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 forMay 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 planto a public DB plan◦ Employee and employer contributions permitted

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Investment risk assumed by employer in DB plan scenarioscenario

DB plans facing challenges to achieve fully funded status due to:◦ Stock market volatilityy◦ 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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ArizonaC lif i

NevadaNew 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 hDB/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 favorshorter 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 employerg 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 vestedpowerful retention tool for valued, vested employees

More difficult to offer ancillary benefits such as disability and special early retirement in a DCdisability and special early retirement in a DC plan

More difficult to provide benefits comparable to a DB plan for public safety employeesDB 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

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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 investmentcollective 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 option

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/depreciationLoans 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 hiresbenefits 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 dterminated

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 arenamay also be seen in public DC arena

Some public funds not part of the retirement portion of Social Securityportion of Social Security

Regulatory trend toward market-based accountingg

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Center for Retirement Research at Boston College – Special Projects for State and Local Pension PlansProjects 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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