Last week, a message to San Diegans arrived in the mail from organized labor. Alongside a photo of a firefighter cradling an adorable toddler, the note warned that a pension reform measure would leave firefighters and other city workers without a retirement safety net.

The mailer underscored opponents’ key argument: Switching most new city employees to a 401(k)-style retirement plan will leave them vulnerable to the whims of Wall Street in their golden years.

It’s that argument that first led Bonnie Dumanis, the district attorney and mayoral aspirant, to come out against the measure. Months later, however, she did an about face. Her reasoning: She’d been convinced that the measure actually did provide that safety net, in the form of what’s known as an annuity.

Before that, fellow Republican candidate Nathan Fletcher had invoked the annuity in justifying his support as well. “You can give a stable and secure retirement because if you have an annuity it doesn’t get wiped out with the up or down of the stock market,” he said.

And the other lead Republican on the campaign trail, Carl DeMaio, says he specifically wrote annuities into the measure.

So, in a campaign dominated by pension issues, annuity’s become a hot word. Well, what is it?

The Great Risk-Shift

The difference between a traditional guaranteed pension and a 401(k) comes down to risk.

The goal of an annuity is to make a 401(k) a little more like the traditional pension: to provide a guaranteed source of income insulated from investment losses.

But they operate much differently.

In a pension system like the city has now, an employee receives a guaranteed payout provided she works enough years to qualify, regardless of how much money is in the system or how investments have done. The city takes the investment risk and taxpayers have to cover shortfalls.

With an annuity, the individual employee essentially buys insurance along with a 401(k) to guarantee a minimum yearly payout.

Richard Hiller, a vice president for government markets at TIAA-CREF financial services, projected that someone who starts working at the city at age 30 making $45,000 could retire at 65 with a $72,000 guaranteed annuity.

He assumed the city and the employee socked away a combined 12 percent of salary each year along with modest pay raises.

In Hiller’s projection, the key will still be investment returns.

The employee likely wouldn’t be able to put all of her money into an annuity from day one to reach her projected annual payout. She’ll have to earn enough money from riskier investments along the way to be able to afford that size of a guarantee. Hiller’s projection assumed the employee earns 6 percent a year on her investments.

Unlike a pension, there’s no automatic link between the years an employee works and final pay and her annuity. It’s what you can afford with what you earn. Risk remains with the employee until they totally convert to the annuity and lock in their payment.

“It’s not guaranteed to the same extent that a traditional defined benefit pension is,” Hiller said.

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So under the current pension plan, the city and by default taxpayers carry the risk. With a pure 401(k), it’s the employee. With the annuity added on, it’s the employee and, eventually, an insurance company.

For now, it’s unclear what the city’s annuity options might look like if the measure passes. There isn’t one kind of annuity plan, and companies offer payment options over different times, including for life.

The Next Mayor Will Play A Major Role

Because of the initiative’s timing, multiple mayors likely will be in charge of putting a plan into place.

City Chief Operating Officer Jay Goldstone estimated that labor negotiations to implement the plan could take as long as a year. That would leave it on the next mayor’s plate.

Goldstone expected the city would offer annuities through an outside insurance company or other provider following a competitive bid process. The system would be set up similarly to the 401(k)-style retirement plans the city now offers as pension supplements, he said.

Union leaders already are discussing their options, too. Alan Arrollado, an official with the local firefighter’s union and a pension board member, said employees should pool their money in an annuity plan and allow the retirement system or an outside provider manage it.

“If this passes, that’s going to be the only way to provide any level of retirement security,” Arrollado said.

The Bottom Line

Annuities can offer just as much retirement security as a pension. But there’s a catch. Unlike a pension, in order to have the money to receive a large enough annuity, an employee likely will have to bear much of the initial investment risk herself.

Backers of the initiative turned in 145,000 signatures to the city clerk last week in the hopes of qualifying it for the 2012 ballot.

Liam Dillon is a news reporter for He covers San Diego City Hall, the 2012 mayor’s race and big building projects. What should he write about next?

Please contact him directly at or 619.550.5663.

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Liam Dillon

Liam Dillon was formerly a senior reporter and assistant editor for Voice of San Diego. He led VOSD’s investigations and wrote about how regular people...

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