MACO MACO Speakers from Bolton Partners: Speakers from Bolton Partners: Administrators Breakout Session Ann Sturner, FSA, EA October 26, 2011 Carol Boykin, CFA 1
Defined Benefit plans ◦ Traditionally offered by public employers as the primary retirement benefit Defined Contribution plans Defined Contribution plans ◦ Traditionally a supplemental benefit ◦ Now the primary retirement vehicle in some cases Hybrid plans ◦ Also implemented by some public employers 2
Primary or supplemental retirement benefit Typically participant-directed Employee contribution - voluntary Employer contribution Employer contribution ◦ Discretionary or match or none ◦ Percent of pay or flat dollar amount Common plan & public employer types ◦ 457(b) – government employer (ex. city, county, state) ◦ 401(a) - government employer (ex city county state) ◦ 401(a) - government employer (ex. city, county, state) and K-12 public schools ◦ 403(b) - K-12 public schools 3
Defined Benefit ◦ Funded primarily by employer contributions ◦ Employee contributions often required ◦ Benefit guaranteed ◦ Benefit guaranteed ◦ Tax payer liable for shortfall Defined Contribution ◦ Supplemental plans usually solely funded by voluntary employee contributions ◦ Contributory plans funded by employer ◦ Contributory plans funded by employer contributions + voluntary employee contributions 4
401(a) plan ◦ Typically only for employer contributions if participant-directed ◦ May be supplemented by a 457(b) plan for May be supplemented by a 457(b) plan for employee contributions 457(b) plan ◦ Deferred compensation plan ◦ May have started as a plan that was supplemental to a public DB plan to a public DB plan ◦ Employee and employer contributions permitted 5
Investment risk assumed by employer in DB plan scenario scenario DB plans facing challenges to achieve fully funded status due to: ◦ Stock market volatility ◦ Low interest rate environment ◦ Reductions in actuarial discount rates Employer Contribution - Impact on Budget ◦ Contributions volatile for DB plans, resulting in budget C ib i l il f DB l l i i b d pressure for public employers ◦ Contributions stable for contributory DC plans Increased workforce mobility Increased workforce mobility ◦ Defined benefit plans favor long-tenured employees ◦ Defined contribution plans tend to have a shorter vesting period 6
Contributory DC plan for new hires receiving more attention than shifting all employees to a DC plan Also looking at combining DC and DB plan Also looking at combining DC and DB plan elements Vesting schedules for contributory public DC Vesting schedules for contributory public DC plans may be longer than vesting schedules for other DC plans 7
Arizona Nevada New Hampshire New Hampshire California C lif i North Carolina Florida Virginia Kansas Kansas Wisconsin Kentucky 8
The following public employers provide a defined contribution plan to new hires: ◦ Alaska ◦ Michigan ◦ Michigan ◦ District of Columbia Other states provide a choice of a DC plan p p (ex. Florida, Ohio) Oregon, Utah and Indiana provide a hybrid DB/DC plan to new hires C l h 9
Budget planning facilitated by fixed contribution Considered to be more equitable since shorter vesting period does not only favor shorter vesting period does not only favor longer-tenured employees Eliminates risk of not achieving fully funded Eliminates risk of not achieving fully funded status Investment risk no longer borne by employer g y p y Potentially, but not necessarily, a lower cost solution 10
DB plan considered by some to be a more powerful retention tool for valued vested powerful retention tool for valued, vested employees More difficult to offer ancillary benefits such as disability and special early retirement in a DC disability and special early retirement in a DC plan More difficult to provide benefits comparable to a DB plan for public safety employees DB plan for public safety employees Employer still on the hook for unfunded portion of liability for DB plan Employer makes a contribution to both the DB Employer makes a contribution to both the DB plan for old employees + the DC plan for new employees 11
DC plan could be less equitable if contributions are lower, resulting in less replacement income Longevity risk Longevity risk – concern that participants will concern that participants will run out of money Investment risk shifted to employees – Investment risk shifted to employees concern that participant loses money 12
Employer-directed Employee-directed Larger plans may use separate accounts or Mutual funds including Target Date Funds are collective trusts instead of mutual funds collective trusts instead of mutual funds the most frequently used type of investment the most frequently used type of investment option Long vesting period Shorter vesting period Not portable if not vested Often portable Actuarial valuation required Actuarial valuation not required Full funding requirement Longevity risk Investment risk borne by employer Investment risk borne by employee Provides a guaranteed monthly benefit Does not provide a guaranteed monthly payment benefit payment. Value of account depends upon contributions and appreciation/depreciation No loans No loans Loans and hardship withdrawals may be Loans and hardship withdrawals may be permitted Administrative issues focus on ensuring Administrative issues focus on issues such as accurate benefit payments providing a user-friendly participant website, default option management, making prospectuses available, and providing prospectuses available, and providing participant communications to assist with asset allocation choices Defined Benefit Defined Contribution C 13
Some public employers are offering different DB benefits for new hires benefits for new hires ◦ Longer vesting period ◦ Longer period for eligibility for death benefit ◦ Introducing or increasing employee mandatory I d i i i l d contribution (compared to existing DB plan) Existing DB plans can be closed, frozen or t terminated i t d Some public employers are joining forces to achieve economies of scale ◦ Pooling the administration of their DC plans ◦ Usually a county government and Public School ◦ 457(b), 403(b) and 401(a) ( ), ( ) ( ) 14
Public funds not subject to ERISA, but tend to follow similar guidelines Pending fee disclosure for ERISA DC plans may also be seen in public DC arena may also be seen in public DC arena Some public funds not part of the retirement portion of Social Security portion of Social Security Regulatory trend toward market-based accounting g 15
Center for Retirement Research at Boston College – Special Projects for State and Local Pension Plans Projects for State and Local Pension Plans ◦ http://crr.bc.edu/special_projects/state_and_local_pension_plans.html ◦ Fact sheets on States with DC Plans ◦ “A Role for Defined Contribution Plans in the Public Sector” Center for State & Local Government Excellence ◦ http://www.slge.org/ ◦ Pension reforms map ◦ Public Plans Database ◦ Links to articles (including the CRR one above) 16
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