Retirement Plans Benchmarking May 12, 2016 Overview Purpose - - PowerPoint PPT Presentation

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Retirement Plans Benchmarking May 12, 2016 Overview Purpose - - PowerPoint PPT Presentation

Apr 15, 2023 310 likes •549 views

Retirement Plans Benchmarking May 12, 2016 Overview Purpose Compare across jurisdictions the benefit value of the employer and employee funded benefits for newly hired employees who are expected to retire under the benefit plan provisions

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Retirement Plans Benchmarking

May 12, 2016

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1

Overview

  • Compare across jurisdictions the benefit value of the

employer and employee funded benefits for newly hired employees who are expected to retire under the benefit plan provisions currently in place

  • Assess where the FCPS retirement benefits rank

relative to comparator plans, and the average of those plans excluding FCPS

  • Review income replacement rates to determine

adequacy of benefits at retirement under various age and service assumptions Purpose

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Comparators

  • Alexandria City Public Schools (ALXPS)
  • Arlington Public Schools (APS)
  • District of Columbia Public Schools (DCPS)
  • Loudoun County Public Schools (LCPS)
  • Montgomery County Public Schools (MCPS)
  • Prince George’s County Public Schools (PGCPS)
  • Prince William County Public Schools (PWCPS)
  • Fairfax County Government (FCGV)
  • Federal Government (FERS/TSP/Federal)

Comparator Employers

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Hypothetical Retirees

Retiree # Hypothetical Retiree Age at Retirement Service at Retirement Final pay from schedule * 1 Eligible for unreduced VRS (Rule of 90) 60 30 $97,791 2 Recent FCPS average retiree 62 22 $89,790 3 FCPS age at hire (35), retire at age 65 65 30 $97,791 4 Two years later than retiree #3 (SSNRA will be age 67 for employees hired in 2016) 67 32 $97,791 5 Rule of 90, retire at age 65 65 25 $94,218 6 Two years later than retiree #5 (SSNRA will be age 67 for employees hired in 2016) 67 27 $95,986

*Based on “FY 2016 TEACHER SALARY SCALE 194-day – MA column”

SSNRA = Social Security Normal Retirement Age, the age at which a person can commence their Social Security benefits on an unreduced basis.

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Value of Defined Benefit and Defined Contributions

  • Hypothetical retirees assumed to have retired today

under the current benefit plans.

  • Employees assumed to have received pay increases

under the current pay schedule.

  • ERFC actuarial valuation assumptions were used.
  • Assumed investment return of 7.25% for defined benefit

plan.

  • Defined contribution plan funds are assumed to grow at

7% annually.

  • Employees assumed to make voluntary employee

contributions:

  • minimum amount, amount to maximize employer

match Assumptions:

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Value of Defined Benefit and Defined Contributions

  • For Defined Contribution plans – amount of employee

contributions made during the working career, accumulated with investment earnings. Separate calculation for employee and employer contributions.

  • For Defined Benefit plans – value is the amount the

retirement system will need to hold as a reserve at retirement to fund the lifetime monthly benefit, including allowance for COLA where applicable.

  • Employer funded portion determined as the total less

the value of employee contributions made during career, accumulated at the valuation interest rate. Method used to determine the value:

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Hypothetical Retiree #1 – Age 60 with 30 Years of Service

Defined Benefit VRS Defined Benefit ERFC 2001 Defined Benefit Total Defined Contribution VRS Total Combined Value

Final pay at retirement $97,791 $97,791 Final averaging period 5 3 Final average salary $91,607 $94,970 Benefit multiplier 1.00% 0.80% Annual benefit based on 30 years of service $27,482 $22,793 $50,275 $7,297 - $31,011 $57,572 - $81,286 Total value of benefits with mandatory/minimum DC contributions (Employee Contributions = 8%): Value of benefits $374,974 $322,666 $697,640 $80,140 $777,780 Accumulated value of employee contributions $166,421 $124,816 $291,237 $40,070 $331,307 Employer provided value $208,553 $197,850 $406,403 $40,070 $446,473 Total value of benefits with optional/maximum DC contributions (Employee Contributions = 12%): Value of benefits $374,974 $322,666 $697,640 $340,593 $1,038,233 Accumulated value of employee contributions $166,421 $124,816 $291,237 $200,349 $491,586 Employer provided value $208,553 $197,850 $406,403 $140,244 $546,647

VRS DC funds assumed to earn 7% per year.

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Value of Defined Benefit (DB) Plans

Assumes final salary of $97,791 for all jurisdictions. *Since FCGV has two different benefit plans (C&D), an equal 50/50 split between the plans was assumed before averaging with all other comparators, excluding FCPS, in order to obtain the average line.

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Accumulated Value of Defined Contributions

APS-Arlington Public Schools PWCPS-Prince William County Public Schools

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Combined Value DB & DC with Minimum Contributions

Assumes final salary of $97,791 for all jurisdictions. *Since FCGV has two different benefit plans (C&D), an equal 50/50 split between the plans was assumed before averaging with all other comparators, excluding FCPS, in order to obtain the average line.

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Combined Value DB & DC with Minimum Contributions

← Employee | Employer →

Assumes final salary of $97,791 for all jurisdictions. *Since FCGV has two different benefit plans (C&D), an equal 50/50 split between the plans was assumed before averaging with all other comparators, excluding FCPS, in order to obtain the average line.

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Combined Value DB & DC with Maximum Contributions

Assumes final salary of $97,791 for all jurisdictions. *Since FCGV has two different benefit plans (C&D), an equal 50/50 split between the plans was assumed before averaging with all other comparators, excluding FCPS, in order to obtain the average line.

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Combined Value DB & DC with Maximum Contributions

← Employee | Employer →

Assumes final salary of $97,791 for all jurisdictions. *Since FCGV has two different benefit plans (C&D), an equal 50/50 split between the plans was assumed before averaging with all other comparators, excluding FCPS, in order to obtain the average line.

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Combined Value DB & DC with Maximum Contributions

Assumes final salary of $89,790 for all jurisdictions. *Since FCGV has two different benefit plans (C&D), an equal 50/50 split between the plans was assumed before averaging with all other comparators, excluding FCPS, in order to obtain the average line.

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Combined Value DB & DC with Maximum Contributions

← Employee | Employer →

Assumes final salary of $89,790 for all jurisdictions. *Since FCGV has two different benefit plans (C&D), an equal 50/50 split between the plans was assumed before averaging with all other comparators, excluding FCPS, in order to obtain the average line.

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Observations Defined Benefit—FCPS Plans Compared with Fairfax County Plans for General Employees

  • At all age and service combinations examined, the County’s Plan C defined benefit plan

provides greater income and lower participant contribution levels than required under the ERFC 2001 / VRS Hybrid defined benefit plans

  • Factors contributing to the difference include: (1) Rule of 85, and (2) Pre Social Security

Feature.

* The annual benefit excludes cost-of-living-adjustment increases

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How Much Retirement Income Is Enough?

Table IV-1 Replacement Income Needed by Source Income Before Retirement From Social Security Private and Employer Plan Replacement Needed $30,000 59% 31% 90% $40,000 54% 31% 85% $50,000 51% 30% 81% $60,000 46% 32% 78% $70,000 42% 35% 77% $80,000 39% 38% 77% $90,000 36% 42% 78% $150,000 23% 61% 84%

Source: Aon Hewitt Replacement Ratio Study Final pay for retiree examples ranges from $89,790 to $97,791

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How Much Retirement Income Is Enough?

Table IV-4 – FCPS Retiree #1 Age 60 with 30 Years of Service Entity From Defined Benefit Plans From Defined Contribution Plan From Social Security Total Total Employee Contribution Mandatory Contributions Only FCPS 51% 7% 0% 58% 8% FCGV Plan C 84% 0% 0% 84% 4% Maximizing Matching Contributions FCPS 51% 32% 0% 83% 12% FCGV Plan C 84% 0% 0% 84% 4%

Assumed need at retirement—78% At age 62 retirees can begin drawing Social Security Benefits. Social Security benefits starting at age 62 will replace an additional 24% of final pay, sufficient to meet the replacement of income need under either scenario (mandatory contributions only or the retiree has maximized matching contributions).

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How Much Retirement Income Is Enough?

Table IV-5 – FCPS Retiree #2 Age 62 with 22 Years of Service Entity From Defined Benefit Plans From Defined Contribution Plan From Social Security Total Total Employee Contribution Mandatory Contributions Only FCPS 30% 5% 24% 59% 8% FCGV Plan C 31% 0% 24% 55% 4% Maximizing Matching Contributions FCPS 30% 20% 24% 75% 12% FCGV Plan C 31% 0% 24% 55% 4%

Assumed need at retirement—78%. The retiree in this example does not meet the “Rule of 90” under the VRS Hybrid Plan and thus has a significant reduction in benefits for early retirement. With three years of additional service (age 65 and 25 years of service) the retiree reaches the Rule of 90 and unreduced benefits are then 77% of final pay with mandatory contributions only, and 96% of final pay if matching contributions are maximized.

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How Much Retirement Income Is Enough?

Table IV-8 – FCPS Retiree #5 Age 65 with 25 Years of Service Entity From Defined Benefit Plans From Defined Contribution Plan From Social Security Total Total Employee Contribution Mandatory Contributions Only FCPS 42% 6% 28% 77% 8% FCGV Plan C 70% 0% 28% 98% 4% Maximizing Matching Contributions FCPS 42% 26% 28% 96% 12% FCGV Plan C 70% 0% 28% 98% 4%

Assumed need at retirement—78%. The participant meets the Rule of 90 under VRS and is thus able to significantly enhance their retirement benefit.

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Key Findings

  • Newly hired FCPS employees will retire with lower benefits than Fairfax County general employees,

but higher benefits than all but one other school system (District of Columbia); mandated contributions for FCPS participants are higher at 8% than all other peer group employers except the District of Columbia (also 8%)

  • For short service employees retiring at early ages (e.g. age 62 and 22 years of service) benefits are

not adequate to maintain the retiree’s pre-retirement standard of living, in the absence of supplementary savings or retirement savings through earlier employment

  • Employees with longer service retiring at later ages will have adequate income at retirement,

especially if they take full advantage of the matching contributions available

  • The examples in the report illustrate the importance of participants contributing as much as they can

as early as they can to the voluntary contribution feature of the VRS Hybrid Plan, and the powerful impact such contributions will have on their retirement income security

  • Summary—participants can achieve adequate retirement savings through a combination of personal

actions and career retirement planning, by maximizing the matching contributions available and deferring retirement until they are eligible for unreduced VRS and ERFC benefits and unreduced Social Security benefits.

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Options for Possible Future Consideration

  • Continue to support the benefit level provided by the current ERFC plan.
  • Modify ERFC to establish a minimum retirement age of 55 years for new hires.
  • Lower the interest crediting rate on ERFC member accounts from 5% to 4%.
  • Increase the ERFC averaging period for the final average salary from 3-years to 5-years

for new hires.

  • Change the Cost-of-living-adjustment for new hires to equal the annual change in the

CPI-U index, with a maximum increase of 4%.

  • Eliminate ERFC plan for new hires and replace with an employer match on a Defined

Contribution plan; material savings to FCPS will not occur in the immediate future.

  • Eliminate ERFC plan for new hires; material savings to FCPS will not occur in the

immediate future.