Modernizing Public Sector Defined Contribution Plans Act
| Model Bill Info | |
|---|---|
| Bill Title | Modernizing Public Sector Defined Contribution Plans Act |
| Date Introduced | July 18, 2025 |
| Type | Model Policy |
| Status | Draft |
| Task Forces | Tax and Fiscal Policy |
Modernizing Public Sector Defined Contribution Plans Act
Key features include:
A core IRC Section 401(a) defined contribution platform forms the primary vehicle for the mandatory features of the plan. One or a combination of additional voluntary savings plans (IRC Section 401(k), 403(b), and eligible 457(b) DC plans can be used to create an integrated system of plans as needed.
Mandatory participation to eliminate the inherent weaknesses of voluntary-only savings approaches.
A defined retirement income target:
The DC plan starts with a specified retirement income replacement objective defined by the employer (similar to a DB plan, except in the plan there are no employer guarantees of reaching the targeted income level so there is no chance to accrue unfunded pension liabilities of any kind).
A defined contribution rate:
Total employer and employee contributions are defined based on what is determined to be necessary to provide that retirement income objective and are paid into a personal individual retirement account that belongs to the employee.
[Note: Matching employer contribution designs may also be considered but are not a best practice for a core plan intended to provide substantial accruals for a broad class of employees.]
Short or immediate vesting rules to reduce the risk of benefit forfeiture of these important forms of deferred compensation.
A professionally managed set of investment offerings:
The individual accounts’ assets are default invested in professionally managed funds that are designed to create high probabilities of meeting the retirement income objective based on available demographic and financial information for each participant and do not require decisions from the employee.
An alternative investment menu of diversified funds allowing participants to personally direct their plan investments with plan provided investment advice and counseling.
A mobile benefit:
Ultimately, the assets in the account are owned by the employee and can be taken with them if they leave employment before completing a full career.
A default benefit payment structure provides lifetime income benefits through group in-plan annuity products with additional options (lump-sum, periodic payments, etc.) that can be customized by the individual participant to meet the individual participant’s needs and circumstances
Public Sector Retirement Income Plan Act
Chapter 1. Creation of Retirement Plan and Trust
Section 1. An individual account defined contribution retirement plan is created to provide retirement benefits for eligible employees. The primary objective for the plan is to help eligible employees achieve an adequate and secure income for life in retirement. The plan provides opportunities and services for eligible employees to customize the investments and benefit forms to meet their personal needs and objectives.
Section 2. A trust is created for the investment of plan assets. The trust shall be held, invested, and administered by the board acting as trustee and fiduciary in accordance with the terms of the plan under this chapter and applicable law solely in the interest of plan participants and their beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan. Except as provided in chapter 2, section 9, no assets of the plan shall inure to the benefit of any participating employer.
Chapter 2. [Name of Plan] Defined Contribution Plan
Section 1. Definitions
In this article, unless the context otherwise requires:
A. “Beneficiary” means the recipient designated by the participant to receive the plan benefits payable upon the death of the Participant.
B. “Board” means the board of trustees of the [Plan Name] established by this chapter.
C. “Code” means the federal Internal Revenue Code of 1986, as amended.
D. “Compensation” means [insert desired definition or appropriate cross reference to related statute definition].
E. “Defined contribution retirement plan” means the [Plan Name] defined contribution retirement plan established pursuant to this chapter.
F. Employee” means [insert desired definition or appropriate cross-reference to related statutory definition that contains provisions relating to eligible classes of employees and exclusions based on minimum age or service requirements or part-time, full-time, or temporary status.]
G. “Employer” means [insert desired definition or appropriate cross-reference to related statutory definition].
H. “Individual account” means an account that is established for each participant to record the deposit of participant contributions, employer contributions and interest, dividends or other accumulations credited on behalf of the participant.
I. “Participant” means an employee participating in the plan under section 3 of this chapter.
Section 2: Board of trustees; powers and duties of the board; investments, administration
A. [Insert provisions identifying or creating the fiduciary body charged with governance and administration of the plan. This could be a new board of trustees or an existing board (e.g., an existing pension board). The board shall administer the defined contribution retirement plan established under this chapter.]
B. The plan shall be a qualified governmental plan under section 401(a) of the Code and be exempt from taxation under section 501 of the Internal Revenue Code.
C. The board shall provide participants with individualized ongoing investment and retirement income planning services, including education and plan-based tools and independent investment advice to help set, measure, and adjust personal retirement income and savings goals as appropriate during their working years to help the participant meet their financial objectives in retirement and changing circumstances.
D. The board shall create an operating plan document consistent with this chapter and may adopt any additional provision to the plan necessary and appropriate for its operation and purpose. The board may submit to the Internal Revenue Service a request for a determination letter or other rulings that the plan and its features is qualified under section 401(a) of the Code.
E. The board shall:
Enter into a contract with a company or companies to provide and administer retirement plan investments, retirement lifetime income products and annuity products, plan administrative services and participant level education, advice, communication and retirement planning services supporting individualized lifetime retirement income objectives for participants. Provide appropriate long-term retirement-oriented investments that can satisfy two distinct goals; management of future retirement income risk, including investment risk, longevity risk, and portfolios that strive to reduce volatility of participant account balances as they grow closer to retirement. Consider all the following when determining a company or companies with which to contract: a. The financial stability of the company and the ability of the company to provide the contracted rights and benefits to the participants. b. The cost of the investments offered, plan administration, and services to the participants. c. The quality of the investment design or designs provided to achieve the specified replacement income using targeted retirement income principles. d.. The experience of the company and its ability to record keep and administer retirement income focused plans like the plan created under this chapter. e. The experience of the company in providing lifetime retirement income to plan participants. f. The experience of the company in providing plan education, retirement planning, counseling, and independent advice to plan participants with varying sources and levels of retirement income. Require under the contract that the provider provide education, retirement savings planning, counseling, and objective participantspecific plan investment advice to participants. The board shall provide participants with a menu of in-plan immediate or deferred lifetime annuity options, either fixed or variable or a combination of both. Annuity options may include both nominal and inflation protected options. Qualified longevity annuity contracts under the Code shall be provided to allow participants another option for managing longevity risk.
F. The board may:
Employ other services it deems necessary, including legal services, for the operation and administration of the defined contribution retirement plan. Perform all acts, whether expressly authorized, that it deems necessary and proper for the operation and protection of the plan.
G. The board shall adopt policies regarding the defined contribution retirement plan, including the administration of the participant and employer contributions, investment options, termination of participation in the defined contribution retirement plan, administration of the payout options under the defined contribution retirement plan, and administration of the participant distributions.
H. The board shall participate in a competitive bid process at least once every five years to contract with a private person or any qualified company or companies to administer the defined contribution retirement plan established pursuant to this article.
I. Any contract for a third-party administrator of the defined contribution retirement plan shall include competitive fees and provisions requiring quarterly meetings with the system, annual updates to the board on the status of the defined contribution retirement plan and quarterly statements to each participant.
J. On or before [DATE FOR STATE’S PRE-EXISTING PLAN REPORTING] of each year, the board shall report the status of the defined contribution plan to the governor, the president of the senate, the speaker of the house of representatives and [ADD ADDITIONAL STANDING LEGISLATIVE COMMITTEES AS DESIRED]. The report shall include a summary of demographic data and cumulative account balances for participants in the Targeted Retirement Income Plan and wealth accumulation plan, as well as summary statements as to the progress of Targeted Retirement Income Plan members with at least five years of service towards their income replacement goals.
Section 3. Eligibility and participation in the plan
A. An employee with employment beginning on or after [Date] shall be a participant in the plan effective with the beginning of the month following employment date. [Add alternative language as needed for plan sponsor’s desired entry dates.]
B. [Add additional eligibility and participation provisions for other groups of employees – e.g., current employees in an existing DB pension or another DC plan that may elect participation in this plan for future service and transfers of assets from those plans to this plan.]
Section 4. Participant and employer contributions; employer pick-up arrangements
[Note: Total employer and employee contributions should be at least 12-16% of compensation for non-safety employees. The total contribution for public safety should be 18-25%. The proportionate share is at the discretion of lawmakers but a 50%/50% share is recommended.] Contributions must be at the higher end of the ranges, or above, if the employer does not participate in Social Security.]
A. Each participant in the plan shall contribute [x] percent of the participant’s compensation by salary reduction that shall be deposited in the participant’s individual account.
B. [OPTIONAL PROVISION] A participant may make a one-time irrevocable election, before the participant is eligible to participate in any qualified plan of the employer, to contribute more than the percentage subsection A, up to the amount allowable under Section 415(c) of the Internal Revenue Code, which shall be the participant’s contribution rate for the remainder of the participant’s employment with any employer.
C. Although designated as employee contributions, all participant contributions made to the plan shall be paid by the employer as permitted under Section 414(h) of the Internal Revenue Code. The contributions picked up by an employer may be made through either a reduction in the participant’s compensation or an offset against future salary increases. A participant in the plan may not choose to receive the contributed amounts directly instead of the employer paying the amounts to the plan. All participant contributions that are paid by the employer as provided in this subsection shall be treated as employer contributions under 414(h) of the Internal Revenue Code, shall be excluded from the participant’s gross income for federal and state income tax purposes and are includable in the gross income of the participant or the participant’s beneficiaries only in the taxable year in which they are distributed.
D. Each employer shall annually contribute equal to [X] percent of each participant’s compensation.
E. The employer share of the amount paid in [SUBSECTION D] of this section shall be paid on each date that a participant contribution is made and shall be credited to the participant’s individual account.
F. A participant may not take loans on any portion of the accumulated assets in the participant’s individual account.
G. [Optional Provision: Participants may make after-tax voluntary contributions in accordance with requirements set by the board.]
Section 5. Vesting
A. A participant’s contributions and earnings on those contributions are immediately vested and nonforfeitable. A participant is fully vested in the employer contributions and related earnings in the plan after [NO MORE THAN 3] years of participating employment or reaching age 65 [or other normal retirement age definition]. [Immediate or short vesting schedules are a best practice, but other cliff or graded vesting provisions may be adopted if needed.]
B. The plan will disregard all periods of participation and service of a non-vested participant who leaves eligible employment and takes a total distribution of the participant’s accounts. If the former participant returns to eligible employment, the participant will be treated as a new employee under the plan.
Section 6. Direction of Investments
A. A participant shall direct the investment of their individual account to one or more investment choices provided by the board.
B. The board shall provide a standard investment menu of investment choices for participants, including:
A set of predetermined investment portfolio options designed to reflect different risk profiles that automatically reallocate and rebalance contributions as a participant ages and constructed to help create high probabilities of achieving the retirement income objectives of the plan. The standard options under this provision shall be the default investments for individual accounts unless the participant chooses alternative investments under the plan. The standard investment portfolios shall be constructed to adjust the investment allocation on an individual basis over an individual’s career with the intent to accumulate assets at retirement sufficient, in combination with federal social security benefits, to provide the retirement income objectives of each participant. The standard investment portfolios shall be constructed to allow participants to include other assets and retirement plan benefits outside of the plan in determining their investments under the plan. While the level of retirement income may be targeted, it is in no way an obligation of the plan, the employer, the board, or the state, nor is there any expressed or implied guarantee of a certain outcome. [Note: The model legislation does not prescribe a particular way for the board to build the automatic default option. It could be a target date, or LDI or some other approach that may change based on changing products and investment environments.] A set of diversified investment options allowing the participant to construct an alternative investment portfolio.
Section 7. Plan distributions; standard lifetime annuity form of benefits; alternative forms of distribution
A. A participant may receive distribution of vested benefits from their individual account in the plan after:
Attainment of age 65, Separation of all eligible employment under this chapter.
B. The standard form of distribution shall be a lifetime annuity made available by the board based on the value of the individual account of a participant. The standard lifetime annuity shall be paid as a 50% joint and survivor annuity if the participant has a spouse unless the spouse waives this form in a manner established by the board.
C. A participant may elect one or a combination of the following alternative distribution forms:
A lifetime annuity based on a portion of their individual account, Lump-sum amounts, Periodic distributions, as authorized by the board, Deferred distributions until otherwise required by federal law.
D. If the participant dies before receiving the entire value of the individual account, it shall be paid to the surviving spouse or an alternative beneficiary designated by the participant or under applicable law in a form allowed under this section.
Section 8. Disability benefits [OPTIONAL PROVISION: Modify as needed to define the disability benefit and funding sources to be provided].
Each participant and each employer shall contribute to the [NAME] disability program established under [citation].
Section 9. Retiree health benefits [OPTIONAL PROVISION: Modify as needed to define the retiree health benefit and funding sources to be provided].
Each participant and each employer shall contribute to the [NAME] Retiree health program established by under [citation].
Section 10. Amendment and Termination of Plan
The plan may be amended or terminated by appropriate legislation at any time without obtaining the approval or consent of any employer which has adopted this Plan and Trust provided that no amendment shall authorize or permit any part of the corpus or income of the Plan to be used for or diverted to purposes other than for the exclusive benefit of participants and their beneficiaries. No amendment to the Plan shall be effective to the extent that it has the effect of decreasing a Participant’s accrued benefit.