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By Paula Sanford, Center for State and Local Government Excellence

Editor’s note: The following is an excerpt from the full Issue Brief published in March, 2014 by the Center for State and Local Government Excellence, which can be found here in its entirety.

Introduction

Public retirement plans have undergone significant reforms that require changes in how employees prepare for retirement. In particular, employees are increasingly assuming more responsibility for funding their retirements, including needing greater personal savings. Yet, research on how to accomplish this goal in public sector retirement systems is limited.

This report examines the use of automatic features in public sector retirement plans, focusing on automatic escalation to increase retirement plan contributions. While automatic escalation is widely used in the private sector, only a handful of governments have adopted it for their defined contribution plans. Obstacles to use of automatic escalation include perceptions about the need for it, legal constraints, concerns about what might be seen as government paternalism, and limited employee financial flexibility. Nevertheless, some governments have overcome these challenges and successfully introduced automatic escalation to help raise employee retirement savings. As defined contribution plans become more important to supplement other public sector employee retirement benefits, tools such as automatic enrollment and automatic escalation may become valuable in helping employees meet their retirement goals.

Methodology

This study is based on a review of written research and interviews with experts on public defined contribution plans. Academic literature on automatic escalation is scant, and what research exists is part of a larger analysis of automatic features.1 In addition, most research and writing consider automatic escalation only in the context of private sector 401(k) plans. This is the first study to examine automatic escalation for public sector retirement plans and supplemental defined contribution plans. Because of the dearth of research on this topic, interviews with eight individuals who work for either government or organizations that assist public sector retirement plans were very valuable and provide the basis for the findings and conclusions in this report.2

Automatic Escalation to Encourage Retirement Saving

Automatic escalation is a plan design feature within the larger component of automatic features used to promote savings. Defined contribution plans are expanding their use of automatic features to make saving easier and to improve retirement income outcomes for participants. Increased use of these tools is based on behavioral economics research, which has examined obstacles to saving for retirement, including knowing how much to save, how to invest, and how to develop the willpower to save.

Two options that have proven successful in encouraging savings are automatic escalation and automatic enrollment. Under automatic escalation, a participant’s contribution to a defined contribution plan is increased at regular intervals, typically annually, until a predetermined contribution level or cap is reached. The amount of the automatic increase can be either a percent of salary—most often 1 percent of salary—or a fixed dollar amount. Ideally, the increase in retirement contributions coincides with an annual raise so that the employee does not experience a net loss in take-home pay. The underlying assumption for automatic escalation is that slowly increasing retirement contributions reduces employee resistance to savings.

Under automatic enrollment, the plan has a default enrollment contribution rate, such as 3 percent and an opt-out provision. Research has found automatic enrollment to be extremely successful at encouraging employees to save for their retirement. For example, private sector employee participation rates in retirement plans have reached 90 percent with automatic enrollment.3 In most cases, however, automatically enrolled employees remain at the initial default rate.4

Combining Features to Boost Savings

In order to boost the level of savings, some retirement plans incorporate automatic escalation with automatic enrollment, which has been shown to be very successful in helping employees achieve retirement readiness.5 Automatic enrollment and escalation work well together because many employers are inclined to set the initial automatic enrollment contribution rate at a very conservative level. In the public sector, this is generally due to employers wanting to prevent employees from opting out of the retirement plan because the default contribution is too high, although research has shown that employees generally stay in plans, even with higher default contributions.6

Current Public Sector Retirement Environment

Automatic features are still relatively rare in the public sector, with automatic enrollment being more widely adopted than automatic escalation. A March 2013 National Association of Government Defined Contribution Administrators (NAGDCA) survey7 showed that of the 136 government defined contribution plans represented, 73 percent had elective plan participation and of these, only 8 percent used automatic enrollment. The primary reasons for not adopting automatic enrollment were anti-garnishment laws or the lack of any perceived need for the feature.

The following findings emerged from a January 2014 NAGDCA informal e-mail survey of its members about use of automatic escalation:

  • Eight plan sponsors/governments reported offering the feature for their defined contribution plans, and three additional governments were considering it.
  • Of the plans using automatic escalation, seven were statewide plans or state and local plans and one plan was only for a local jurisdiction.
  • In all cases, the feature was used in a 457 defined contribution plan.

Three of the governments that reported using automatic escalation in the NAGDCA e-mail survey are highlighted as case studies in this report.

Between 2009 and 2013, 48 states modified their retirement benefits, most often to increase plan financial stability and lower the plan sponsor’s or employer’s risk.8 Other reasons for reforms include creating portable retirement benefits for today’s more mobile employees and equalizing benefits between the public and private sectors. Many of the changes led to lower benefits for employees when they reach retirement age.

A 2014 study by the Center for State and Local Government Excellence and the National Association of State Retirement Administrators (NASRA) found that the average retirement income for employees is about 92 percent of pre-reform benefits for the 24 state pension plans in the study.9 As a result, new employees will need to work longer or save more to have the same retirement income as their predecessors. In some cases, they will need to save an additional $100,000 to reach the pre-reform benefit level. Since 2009, 22 states have changed their cost-of-living (COLA) provisions in one or more plans.10 Other changes to defined benefit plans have included increasing the number of years and months used to calculate the final average salary and raising the normal retirement age. Even though benefit multipliers, in most cases, have not decreased, these reforms still have a negative financial impact on retirement income. For example, increasing the final average salary calculation from three to five years results in a 2.4 percent reduction in the annual benefit.11

Hybrid Plans

One of the most significant trends in public sector retirement has been the rise of the hybrid plan. Sixteen states now offer hybrid plans as either a mandatory or optional retirement benefit.12 One of the most important components of the hybrid plan is the greater sharing of risk between the employer and the employee over the traditional primary defined benefit plan. There are two types of hybrid plans, a “combination plan” and a “cash balance plan.” The most common form combines a lower-level defined benefit plan coupled with an individual defined contribution plan to help employees save for retirement. Combination hybrid plans vary widely in the extent to which employees are required to participate in the defined contribution option. For example, Oregon, Rhode Island, and Washington require state employees to make some contribution to the savings plan, while Utah and Georgia make contributions optional. However, Georgia uses automatic enrollment to encourage savings and offers an employer match to employees who choose to contribute to the plan.

Because of the lower defined benefit associated with a combination hybrid plan, individual savings are very important to help employees reach retirement income goals. For a hybrid plan that provides a defined benefit with a 1 percent multiplier, after 30 years an employee will have 30 percent of his or her income replaced. If Social Security is added, approximately 60 percent of working income is replaced—still far below the commonly cited 80 percent income replacement goal.

Tables 1 and 2 provide two scenarios—one with and one without Social Security—for defined contribution rates required to achieve 80 percent of final salary after 35 years of employment for a combination hybrid plan with a 1 percent defined benefit formula.

Table 1 shows that employees need to save more as their salary increases, due to Social Security providing a smaller percentage of income. Table 2 shows that employees who will not receive Social Security need to contribute significantly more to a defined contribution plan in order to achieve a replacement income of 80 percent at retirement. Since many employees do not reach a 35-year career in government, savings will need to be even higher than shown in the tables. In cases where employee contributions need to be relatively robust to have an adequate retirement income, such as in most hybrid plans, automatic escalation may be a valuable tool.

Table 1. Defined contribution savings rate for a hybrid plan with Social Security 13

Table-1-Defined-contribution-savings-rate-for-a-hybird-plan-with-Social-Security

Table 2. Defined contribution savings rate for a hybrid plan with Social Security 14

Table-2-Defined-contribution-savings-rate-for-a-hybird-plan-without-Social-Security

In the second type of hybrid plan, the cash balance plan, employer and employee contributions are pooled, and the employer/plan sponsor manages the investments on behalf of employees. Employees are guaranteed a certain rate of return through the life of the plan. Upon retirement, an employee may “purchase” an annuity from the plan or receive a partial or total lump sum payment. Rules regarding guaranteed returns and payouts vary by plan. In public cash balance plans, employee contributions are mandated and set. However, in some cases, employer contributions vary by tenure of the employee.15 If the guaranteed investment in the cash balance plan is anticipated to be higher than what the employee would earn from a conventional supplemental defined contribution plan, such as a 457 plan, perhaps employees could be given the opportunity to increase their contributions to the cash balance plan. If so, a voluntary automatic escalation feature may be a desirable option.

Types of Defined Contribution Plans 

401(k) Plan
“A 401(k) Plan is a defined contribution plan where an employee can make contributions from his or her paycheck either before- or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. In some plans, the employer also makes contributions such as, matching the employee’s contributions up to a certain percentage.”
Source: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Definitions

457(b) Plan
“Plans of deferred compensation described in [Internal Revenue Code] (IRC) section 457 are available for certain state and local governments and non-governmental entities tax exempt under IRC 501….Plans eligible under 457(b) allow employees of sponsoring organizations to defer income taxation on retirement savings into future years.”
Source: http://www.irs.gov/Retirement-Plans/IRC-457(b)-Deferred-Compensation-Plans

401(a) Plan
“Generally, any public employer may set up a 401(a) plan. Under this plan: Employer contributions not made pursuant to a salary reduction agreement, but including employer “pick-up” contributions, are deferred from income tax until distribution, and exempt social security and Medicare tax. Employer contributions made under a salary reduction agreement are deferred from income tax, but are subject to FICA tax. Employee contributions pursuant to a salary reduction agreement are subject to income tax and FICA.”
Source: http://www.irs.gov/Government-Entities/Federal,-State-&-LocalGovernments/Government-Retirement-Plans-Toolkit

403(b) Plan
“Plans under [Internal Revenue Code] IRC section 403(b), also called tax-sheltered annuities, are available to certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers. To maintain a section 403(b) plan, a governmental employer must be a public school of a state, political subdivision of a state, or an agency or instrumentality of one or more of these. Many public school employees are covered by 403(b) plans in addition to social security coverage under section 218. 403(b) plans resemble “qualified” (i.e., 401(k)) plans in many respects.”
Source: http://www.irs.gov/Government-Entities/Federal,-State-&-Local-Governments/Government-Retirement-Plans-Toolkit

Shared Responsibility for Funding Retirement

One of the major results of pension reform has been a greater sharing of responsibility between the employee and employer for funding retirement benefits.16 Reductions in retiree health care benefits and possible changes to Social Security add to employees’ fiscal uncertainty. As a result, many public employees need to save far more for their retirement. Supplemental plans, like the 457 plan, provide fairly simple vehicles for public employees to save for their retirements— and behavioral economics research emphasizes that simplicity is crucial to encourage savings. Automatic features add further ease to enhance savings.

Public Sector Challenges with Automatic Escalation

Public sector plan sponsors have been hesitant to adopt automatic features, particularly automatic escalation, for their defined contribution plans. The following sections identify seven challenges to use of automatic escalation in the public sector that have emerged from research, practice, and interviews for this report.

Absence of Need

Overwhelmingly, public employees still have access to defined benefit pension plans. As of 2013, 83 percent of all state and local government workers had defined benefit plans, with 78 percent of employees participating.17 Conventional thinking has been that income from a primary defined benefit plan and Social Security (where eligible) reduced the need for employees to accumulate large balances in supplemental defined contribution plans to fund their retirements. Instead, money saved in a defined contribution plan would be used to pay for unanticipated expenses such as medical costs or home repairs or lifestyle enhancements such as travel. Absent the need for large account balances in supplemental plans, automatic escalation, which is designed to grow savings, could be considered excessive and unnecessary. However, recent public pension reforms, uncertainty about the future of Social Security, and rising health care costs for retirees have altered the anticipated retirement outcomes for public employees, making defined contribution plans a more important source of retirement income than in the past.18

Impact of Mandatory Contributions

Even in instances when public employees’ primary retirement plan is a defined contribution design more closely resembling the private sector benefit, automatic escalation is rarely used because governments typically establish mandatory employee contribution rates.19 Of the eight states that offer primary defined contribution plans to broad employee groups (excluding elected officials and judges),20 only Michigan allows employees to opt out of contributing to the plan. Many public universities provide faculty an option to participate in a defined contribution plan as well, but again, employee contributions are nearly always mandatory. Rather than give employees the opportunity to ratchet up contributions through automatic escalation, many financial experts support setting the initial contribution rate at an amount needed to achieve a reasonable retirement income.21

Risks of Overtaxing Employees

Because public employees typically help to pay for their defined benefits through payroll deduction, employers are often hesitant to withhold more income with a defined contribution plan even if the deductions benefit the employee. Since 2009, 28 states have increased the required employee contribution to their defined benefit plans.22 Currently, the median defined benefit plan contribution for state and local employees is 6.4 percent.23 These contributions are in addition to Social Security taxes (if applicable). Employees are also increasingly paying a greater share of health care costs through higher premiums, co-pays, or deductibles.24 Concerns about overtaxing employees’ ability to pay for benefits are compounded by limited pay raises over the past several years due to the recession. Fortunately, an improving national economy is leading to stronger state and local government budgets and the possibility of more regular salary increases and improved health care cost sharing.

Paternalism

Many policy makers are apprehensive about the perceived paternalism associated with automatic features in defined contribution plans. They believe employees are in the best position to know their capacity to save and how much savings they will need in the future. Two issues arise from this line of thinking:

  • Behavioral economics and research on financial literacy clearly show that employees do not know how much they need to save and need help making good decisions about savings levels.
  • The design of most defined benefit plans is to take the “guess work” out of retirement savings by mandating employee contributions25 and providing a lifetime annuity, which could be seen as a paternal approach to retirement planning.
Increased Employer Costs

Automatic escalation has the potential to increase employer costs for plans with an employer match. Because the purpose of automatic escalation is to raise employee contributions, successful implementation means employer matching contributions will also increase. If an employer knows employees need to save more, yet the sponsoring government does not have the resources to fund a matching benefit for all employees, it would be better for the employer to amend the matching formula before implementing an automatic escalation feature. Employers should consider how design features—automatic escalation or employer match—can result in the best outcomes for employees.

Legal Barriers

In many states, there are legal barriers to adopting automatic escalation. Anti-garnishment laws prohibit employers, including governments, from withholding wages from an employee’s pay without written consent. Only 10 states either do not have laws requiring written employee consent for payroll deductions or have specific exemptions regarding benefit plans. In five other states, the laws are unclear about employers’ ability to make automatic deductions from employee paychecks without written consent. A few states have added specific exceptions to allow automatic enrollment in retirement plans, but have not done so for automatic escalation. In states with anti-garnishment laws, employees would need to voluntarily sign up for automatic escalation in their defined contribution plans. Simply getting employees to voluntarily enroll in a supplemental defined contribution plan can be challenging and adding automatic escalation may be even more difficult. However, the case studies for this research provide innovative strategies to encourage employees to adopt automatic escalation for their supplemental defined contribution accounts.

Not Having a Champion

Because of these challenges, often a champion for the adoption of automatic escalation does not exist. Yet, as with any policy change, one is needed, particularly if legislative changes are required. Rather than relying on elected officials to advance defined contribution plan changes, plan sponsors may want to fill that role. With so many defined benefit plan changes in recent years, it may be time for plan sponsors to evaluate the retirement income needs of employees. Some questions to consider are:

  • To what extent has the defined benefit plan benefit decreased with reform?
  • What is the status of the defined benefit plan’s cost of- living adjustment?
  • Is the cost-of-living adjustment likely to change over the next 10 years?
  • Have there been changes to retiree health benefits?
  • How much more individual savings will employees need to achieve an adequate income in retirement?

Based on answers to these questions, plan sponsors may want to consider amending their defined contribution plan design to further encourage savings.

Lessons Learned and Implementation Advice

The case studies and interviews with experts (see pages 9-13 of the study) demonstrate that automatic escalation can be successfully implemented in the public sector with or without automatic enrollment in a supplemental defined contribution plan. The experts offered several additional lessons learned and implementation advice, which are discussed below.

Assessing Employee Retirement Income

Deciding whether to explore automatic options should begin with an evaluation of anticipated employee retirement income from all potential sources—government pension, Social Security, and private savings. If the first two sources will be insufficient to secure an adequate retirement income, then it may be worthwhile to consider design features that increase participation in the government’s supplemental retirement plan. Where a significant gap exists between income needed and income derived from the defined benefit and Social Security, adding automatic features to the supplemental defined contribution plan, such as automatic escalation, may be appropriate, particularly if other participation incentives such as an employer match are cost prohibitive.

An important factor to explore when assessing defined contribution incentives is the potential mobility of employees. If large segments of the workforce—such as information technology staff—are likely to move between the public and private sectors every few years, supplemental savings become especially important. More mobile employees will likely need to contribute more to the supplemental plan than employees who will secure greater retirement income through a defined plan. Automatic features can be particularly beneficial for mobile workers.

Implementing Automatic Options

Automatic escalation is possible under a variety of political and organizational cultures. For example, the Virginia Retirement System does not offer or promote retirement legislation but rather sees itself as a subject matter expert available to comment on legislation when asked. In contrast, both the Ohio Public Employees Deferred Compensation Program and Missouri State Employees’ Retirement System are more engaged in launching new pilot programs and developing legislation to support pension reform. Yet all three systems successfully implement automatic options.

The following lessons emerged from the three case studies to improve the likelihood of successful implementation of automatic escalation.

  1. Find a champion or be the champion. Every public policy change needs a leader—either appointed or elected—who supports implementation of automatic escalation and is willing to work for its adoption. In the case studies, automatic escalation had strong supporters, including the executive director of the retirement system and/or legislators who changed the law to make implementation possible.
  2. Work with labor groups. In states and localities with active labor unions, direct and regular connections with labor leaders are essential, particularly if it is necessary to restructure existing contracts to implement automatic escalation. In the past, some labor organizations have resisted automatic features over concerns that their implementation would ultimately result in a shift toward greater reliance on defined contribution plans. However, if pension reform has already occurred, automatic escalation can be viewed as a response to defined benefit plan change, not a prelude to it. Even if choosing an opt-in approach to automatic escalation, it may be worthwhile to talk with labor leaders to explain how the feature would be beneficial to employees and hear their feedback.
  3. Be pragmatic and creative. Any innovation such as adding an automatic escalation component to a defined contribution plan requires high degrees of pragmatism and creativity. The first step in implementation is earning board approval. For example, to overcome concerns about employee resistance to an opt-out automatic escalation feature, Ohio DC agreed to a small default contribution amount. Similarly, MOSERS decided to make automatic escalation voluntary, shortly after advocating for legal authority to adopt automatic enrollment. In Virginia, pension officials and legislators agreed that a three-year escalation cycle was an appropriate middle ground. In all these cases, policy makers focused on the goal of getting automatic escalation started, and all succeeded. Another pragmatic and creative factor to consider is learning what flexibility exists under state statutes that could facilitate implementation. For example, Ohio DC’s voluntary 457 plan sign-up with an automatic escalation opt-out provided a non-legislative approach to encourage participation. Finally, when developing an innovative plan design change, it is important to remember that creating a solution to the goal is as much art as science, requiring openness to new approaches and compromise if necessary. 
  4. Focus on feature design to drive participation. How enrollment is handled is a key decision when implementing automatic escalation. Research in the private sector has shown that automatically enrolling employees in an escalation feature dramatically increases participation. According to a 2011 survey by the Principal Financial Group, only about 6 percent of participants will sign up for automatic escalation in 401(k) plans, yet approximately 80 percent of employees will remain in the option if automatically enrolled into it as a plan default.26 By requiring employees to opt out of the automatic escalation feature, Virginia created a very strong participation design. Likewise, MOSERS is evaluating whether to use automatic enrollment in the automatic escalation feature even though adding it will require legislative action. Despite its existing culture of high participation in its 457 plan, Ohio DC wanted to encourage higher employee contributions. By adding automatic escalation as a default, participation in the feature most likely will increase.
  5.  Make enrollment easy. The easier the plan sponsor makes participation, the higher participation will be. Employees participating in MOSERS’s 457 plan just “point and click” twice to start automatic escalation, while Ohio DC’s paper form asks employees to provide their name and employer only, then check a box. In addition, Ohio DC includes the SMarT enrollment form with annual statements sent to all contributing participants who are not already enrolled to encourage immediate action. Additionally, employees joining Ohio DC’s 457 plan are now automatically enrolled in automatic escalation. Of course in VRS, employees in the hybrid plan will be automatically enrolled in the escalation feature. All three organizations do a good job highlighting the supplemental plans and the automatic escalation feature on their websites so employees know how to enroll.
  6. Make the feature flexible. Pension plan officials stressed the importance of flexibility in plan design. In all three cases, employees are able to change the amount of escalation. For example, in Missouri employees can choose a contribution increase amount to a tenth of a percent, while Ohio DC lets employees choose any dollar amount. Both Missouri and Ohio let employees choose the month that the contribution increase will occur. The record keepers in these cases said flexibility in the automatic escalation design is relatively easy to implement as part of other regular updates to employee accounts.
  7. Focus on communication and education. To further encourage participation and/or reduce employee confusion about automatic escalation, extensive information about the feature, including how it works and how it can help employees save for retirement, is essential. The organizations in the case studies highlight automatic escalation on their websites and have financial counselors available to explain the feature. Providing comprehensive information early in the enrollment process—particularly if automatic enrollment in the escalation feature is planned—is essential to ensure that employees know what to expect. Finally, showing employees data about their retirement readiness can be a very effective way to encourage participation in automatic escalation. For example, Ohio DC sends annual statements to 457 participants with account balance projections. This data, coupled with the accompanying escalation enrollment form, has led to 1,000 new participants in the feature each year.
  8. Consider automatic plan enrollment in conjunction with automatic escalation. If, after careful evaluation, automatic escalation is deemed appropriate, it might be the right time to adopt automatic enrollment as well. Considering both options simultaneously may be particularly appropriate if their adoption will require legislation. In the private sector, automatic escalation typically does not exist without automatic enrollment. Study historical participation rates against enrollment goals. Where plan participation and contribution levels are both too low, combining automatic enrollment and escalation may be appropriate.

Paula Sanford, Ph.D., is public service and outreach faculty at the Carl Vinson Institute of Government, University of Georgia.

© 2013 Center for State and Local Government Excellence (SLGE). All rights reserved. Used with permission.  For more information, please contact the SLGE at info@SLGE.org or at 202.682.6100. 

Endnotes

1 For example, VanDerhei, J. 2012. Increasing Default Rates in Automatic Enrollment 401(k) Plans: The Impact on Retirement Success in Plans with Automatic Escalation. Employee Benefis Research Institute. Found at www.ebri.org; VanDerhei, J. and L Lucas. 2010. The Impact of Automatic Enrollment and Automatic Contribution Escalation on Retirement Income Adequacy. Employee Benefits Research Institute. Found at www.ebri.org; VanDerhei, J. 2007. “The Expected Impact of Automatic Escalation of 401(k) Contributions on Retirement Income” in EBRI Notes. Vol. 28(9). Found at www.ebri.org; Thaler, R. and S. Benartzi. 2004. “Save More Tomorrow: Using Behavioral Economics to Increase Employee Savings, Journal of Political Economy. Volume. 112(1), pp. S164–S187.
2 Patricia Bishop (Virginia Retirement System), Rod Crane (TIAACREF), Gregory Dyson (ICMA-RC), Kelly Hiers (Virginia Retirement System), Ralph Marsh (City of Houston, TX), Keith Overly (Ohio Deferred Compensation), Cindy Rehmeier (Missouri State Employee’s Retirement System), Rosemary Roberts (ICMA-RC), and Paul Yakoboski (TIAA-CREF).
Lucas, L. 2013. Best Practices When Implementing Auto Features in DC Plans. Defined Contribution Institutional Investment Association. Found at www.dciia.org.
4 For example, see Madrian, B. and D. Shea. 2001. “The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior.” The Quarterly Journal of Economics. 116(4), pp. 1149–1187; Choi, J., D. Laibson, B. Madrian, A. Metrick. 2003. “For Better or For Worse: The Default Effects and 401(k) Savings Behavior.” In Perspectives on the Economics of Aging. D. Wise (ed.) Cambridge, MA: Nation Bureau of Economics Research, Inc. pp. 81–126; Choi, J. et al. 2004.
5 VanDerhei, J. and L. Lucas. 2010. The Impact of Auto-Enrollment and Automatic Contribution Escalation on Retirement Income Adequacy. Employee Benefit Retirement Institute, No. 349; Van16 USING AUTOMATIC ESCALATI)N IN PUBLIC SECTOR RETIREMENT PLANS TO INCREASE SAVINGS Derhei, J. 2007. The Expected Impact of Automatic Escalation of 401(k) Contributions on Retirement Income. EBRI Notes, Vol. 28, No. 9. Choi, J., D. Laibson, B. Madrian, A. Metrick. 2004. Saving For Retirement on the Path of Least Resistance. Found at www.hks.harvard.edu/fs/bmadria/Documents/Madrian%20Papers/Saving%20for%20Retirement%20on%20the%20Path%20of%20Least%20Resistance.pdf  on February 6, 2014. This is an updated paper originally written in 2001.
6 See Choi et al. 2004.
7 Found at www.nagdca.org.
8 State Retirement Reform Legislation, NCSL Legislative Summit. August 14, 2013. National Conference of State Legislators. Found at http://www.ncsl.org/documents/summit/summit2013/onlineresources/NCSL-Presentation-State-Retirement-Reform.pdf.
9 Center for State and Local Government Excellence (SLGE) and National Association of State Retirement Administrators (NASRA). 2014 forthcoming. Effects of Pension Plan Changes on Retirement Security.
10 NASRA Issue Brief: Cost-of-Living Adjustments. June 2012. National Association of State Retirement Administrators. Found at www.nasra.org.
11 SLGE and NASRA. 2014.
12 NASRA Issue Brief: State Hybrid Retirement Plans. September 2013. National Association of State Retirement Administrators. Found at www.nasra.org.
13 Assumptions to this model: Pre-retirement: 6 percent annual net investment return for DC assets; post-retirement 4 percent annual net investment return for DC assets; no COLA for defined benefits; single life annuity with 10-year certain for defined contribution assets; A-2000 merged gender mortality table with ages set back 3.25 years. Based on information from a third-party vendor.
14 Same assumptions as Table 1.
15 NASRA Issue Brief: State Hybrid Retirement Plans. September 2013. National Association of State Retirement Administrators. Found at www.nasra.org.
16 Sanford, P. and J. Franzel. 2012.
17For full-time employees, access to defined benefit plan reaches 92 percent with 87 percent participating. Found at www.bls.gov/ncs/ebs/bene!ts/2013.
18 Sanford, P. and J. Franzel. 2012.
19 Beshears, J. J. Choi, D. Laibson, and B. Madrian. 2010. Defined Contribution Plans in the Public Sector: Lessons from Behavior Economics. Prepared for NBER State and Local Pension Conference. August 19-20, 2010.
20 Alaska, Colorado, Florida, Indiana, Michigan, Montana, North Dakota, Ohio, South Carolina.
21Sanford, P. and J. Franzel. 2012.
22NASRA Issue Brief: Employee Contributions to Public Pension Funds. January 2014. National Association of State Retirement Administrators. Found at www.nasra.org.
23 www.bls.gov/ncs/ebs/bene!ts/2013.
24 State and Local Government Workforce: 2013 Trends. 2013 Center for State and Local Government Excellence. Found at www.slge.org.
25In cases where employees do not contribute to the defined benefit plan, wage theory would argue that these employees receive a lower salary to compensate for the retirement benefit.
26 Auto Escalation Results. June 2013. Found at www.kdv.com/kdv-resources/automaticescalation-results.