MACO MACO Speakers from Bolton Partners: Speakers from Bolton - - PowerPoint PPT Presentation

MACO Speakers from Bolton Partners: MACO Speakers from Bolton Partners: Administrators Breakout Session Ann Sturner, FSA, EA October 26, 2011 Carol Boykin, CFA

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 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

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 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

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 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

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 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

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 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

C ib i l il f DB l l i i b d

• Contributions volatile for DB plans, resulting in budget

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

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 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

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 Arizona

C lif i

 Nevada

New Hampshire

 California  Florida  Kansas  New Hampshire  North Carolina  Virginia  Kansas  Kentucky  Wisconsin

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 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

C l h DB/DC plan to new hires

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 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

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 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

• f 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

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 DC plan could be less equitable if

contributions are lower, resulting in less replacement income

 Longevity risk

concern that participants will

 Longevity risk – concern that participants will

run out of money

 Investment risk shifted to employees –  Investment risk shifted to employees

concern that participant loses money

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

Employer-directed



Larger plans may use separate accounts or collective trusts instead of mutual funds



Employee-directed



Mutual funds including Target Date Funds are the most frequently used type of investment collective trusts instead of mutual funds



Long vesting period



Not portable if not vested



Actuarial valuation required



Full funding requirement the most frequently used type of investment

• ption



Shorter vesting period



Often portable



Actuarial valuation not required



Longevity risk



Investment risk borne by employer



Provides a guaranteed monthly benefit payment No loans



Investment risk borne by employee



Does not provide a guaranteed monthly benefit payment. Value of account depends upon contributions and appreciation/depreciation Loans and hardship withdrawals may be



No loans



Administrative issues focus on ensuring accurate benefit payments



Loans and hardship withdrawals may be permitted



Administrative issues focus on issues such as providing a user-friendly participant website, default option management, making prospectuses available, and providing

Defined Benefit Defined Contribution

prospectuses available, and providing participant communications to assist with asset allocation choices

C

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 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

I d i i i l d

• Introducing or increasing employee mandatory

contribution (compared to existing DB plan)

 Existing DB plans can be closed, frozen or

t i t d terminated

 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)

( ), ( ) ( )

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 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

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 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)

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