In the most recent Fedsmith.com poll, we asked readers how they compared the FERS retirement plan to private sector plans. About 29% said FERS was better, 26% said it was about the same and about 17% said it was inferior to private sector plans.
While this is not a scientific survey, these results are somewhat surprising in that the federal plan is often touted as a model for the rest of the country to follow. The TSP offers employees flexibility, the government makes substantial contributions and the plans are secure in that the government isn’t about to go out of business with or without a recession.
With the stock market decline in the past several years, private sector plans have fewer people participating in their 401(k) plans (these plans are roughly equivalent to the federal TSP plan) and a number of major employers have cut or eliminated their contributions to 401(k) plans. In fact, according to a recent article in the Wall Street Journal, one expert is quoted as believing that 401(k) plans “don’t work well for the majority of the population.” In fact, many private sector employers, particularly small companies, do not offer a 401(k) plan or any variation of it so employees are left with their savings and Individual Retirement Accounts (IRA).
From the comments we received, at least part of the problem may be that employees preferred the previous retirement system (CSRS). The obvious advantage of that system is that a retiree receives a guaranteed annuity and can calculate the exact amount he or she will receive upon retirement. Employees under this plan did not have to plan their own retirement and had no choice about whether to participate. Deductions were automatic and the employee does not have to pay a Social Security premium. In short, the government system made the decisions for all employees by not offering many options. But it was (and still is for those covered by it) a very secure, predictable system. It is also a very expensive system which was a major reason the government changed the CSRS system and installed FERS.
These defined benefit plans have also run into problems in the private sector. They are expensive and much of the risk and responsibility falls on the employer. The Pension Benefit Guaranty Corp (PBGC) an agency established to protect these traditional retirement programs, is running a deficit of about $5.4 billion for the year and had a deficit of $3.6 billion for 2002. Moreover, says the PBGC total under-funding in the defined benefit system now exceeds $300 billion, the largest number ever recorded. Not surprisingly, companies using these traditional pension plans are often in traditional industries such as steel and auto manufacturers. Like the federal government, companies have been converting to more flexible plans like the 401(k) plans which are often similar to the newer FERS system that covers federal employees hired since the mid-1980’s.
FERS gives employees much more flexibility but isn’t as secure. Moreover, as the stock market has fallen in recent years, people obviously are not happy with the rate of return they have received in the TSP stock funds.
And, according to one employee who sent in comments, like their private sector counterparts, Feds who dip into their nest egg under FERS can face tax consequences that can create a major problem with their retirement plans.
About 39% of employees responding said the TSP is the best part of the FERS system. 13% liked the portability of the plan to jobs outside of government.
As far as what they dislike about the FERS system, most employees responding do not like the uncertainty of how much they will receive in retirement. In short, they prefer the defined benefit CSRS plan more than the FERS system. Approximately 38% selected this as the least desirable aspect of FERS. Another comment we received from several FERS employees reflected the belief of this Forest Service employee:
“I am an FERS employee. I am told that when I retire, my accumulated sick leave simply goes down the drain. This is not true of CSRS employees, and I don’t believe that this is right. I presently have accrued about 6 months sick leave which I consider ‘insurance’, but I do resent the fact that It is use or lose. I see some co-workers who use it as fast as they earn it because ‘it isn’t going to do them any good to save it.’ ”
Here is what one Air Force employee had to say about the two federal retirement programs:
“When FERS came out, I used the benefits program to examine whether to change or not. I could not find a single instance where FERS was better than CSRS for the same investment. That was without including the reduced Social Security I expect to receive. I stayed with CSRS and don’t regret it!”
In short, the FERS system is not widely admired by those taking our survey, at least in part because employees believe the CSRS system was more advantageous. With the significant stock market decline in the past several years, the disadvantages of the FERS system are obvious as many TSP investors have lost part of their retirement savings. On the other hand, 55% of those who chose to respond do believe that the FERS system is at least as good if not better than private sector plans.