Casey Srader, City of Plano, TX

Rich Harris, Denver Employees Retirement PlanGlenn Sherman, ICMA-RCRick Johnson, Segal Co.

Moderator:

Speakers:

Tuesday, June 2, 20152:00 – 3:151.5 CPEs

Developing a Comprehensive Benefit Strategy

COMPREHENSIVE BENEFITS STRATEGYHow it all fits together…

Rich HarrisDenver Employees Retirement Plan

Retirement Income

Social Security

Personal Savings and Investments

Typical State/Local

Gov’t Pension

We all know about these three legs of the stool.

But are employees taking full advantage of what’s being offered?

3

Social Security – How it Works

AIMEApplicable

Benefit Percentage

Applicable Benefit

Lowest Tier

Middle Tier

Highest Tier

Total Monthly Maximum

$826 90% $743

$4,154 32% $1,329

$4,086 15% $613

$9,066 30% $2,686

Annual Maximum $108,792 30% $32,227

The following table shows one of the most important calculations in almost every American’s life:

Do you see how it is “biased” toward low earnings?

But how many people really understand the significance of that?

4

How Social Security Works

$6,0

00

$12,

000

$18,

000

$24,

000

$30,

000

$36,

000

$42,

000

$48,

000

$54,

000

$60,

000

$66,

000

$72,

000

$78,

000

$84,

000

$90,

000

$96,

000

$102

,000

$108

,000

0%20%40%60%80%

100% 90%

42%30%

Annual Social Security Benefits as a Percentage of Increasing

Levels of Average Indexed Earnings

5

How Social Security Works

$6,000 $27,600 $49,200 $70,800 $92,400 $114,000 $135,600$0

$5,000$10,000$15,000$20,000$25,000$30,000$35,000

$8,640

$24,565

$32,108

Annual Social Security Benefits for Vary-ing Levels of Earnings

End of Career Annual Earnings

6

Social Security

Employee Contributions?

Employer Contributions?

Required ParticipationParty Responsible for

Paying Benefits

Benefits Payments Term

Survivor Benefits Available?

Inflation Protected?

Yes

Yes

Yes

US Gov’t

Lifetime

Yes

Yes

Strength of “Stool Leg” Strongest

Analysis of “Strength of Stool Leg”

Benefit Maximization Strategy

Paying FICA taxes for 35

years

7

How is A Typical DB calculated?

Example of Typical Public Sector DB

◦ 1.5% multiplied by number of years of credited service times the average monthly salary (based on the highest 36 consecutive months of salary)

◦ Example: The member is age 65, has 20 years of credited service, has an end of career annual salary of approximately $60,000 and an average monthly salary of $5,000.

◦ 1.5% X 20 Years = 30% X $5,000 = $1,500/month, or $18,000 per year

This calculation represents a Normal Retirement benefit

8

How Typical DB benefit is Calculated

5 10 15 20 25 30 35$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$4,500$9,000

$13,500$18,000

$22,500$27,000

$31,500

Typical DB Annual Benefit

Years of Service

Assuming High Average Annual Salary = $60,000 at age 65

Typical State/Local Gov’t Retirement Benefits Depending on Years of Service

9

Combining Both Life Annuities

5 10 15 20 25 30 35$0

$20,000

$40,000

$60,000

$20K $20K $20K $20K $20K $20K $20K

$4.5K $9K$13.5K

$18K$27.5K

$27K

$31.5K

Combined Social Security and Typical DB Benefit at Varying Levels of Public Sector Service

Social Security Benefit at Age 66Typical DB Benefit

Years of Service

Social Security benefits based on 35 years of employment and end-of-career pay of $60,000

Assuming High Average Annual Salary = $60,000 at age 65

10

Combining Both Life Annuities

5 10 15 20 25 30 350%

50%

100%

33% 33% 33% 33% 33% 33% 33%

8% 15%23%

30%38%

45%53%

Combined Income Replacement at Varying Levels of State/Local Gov’t Service

Social Security Benefit at Age 66Typical DB Benefit

Years of Service

Social Security benefits based on 35 years of employment and end-of-career pay of $60,000

Assuming High Average Annual Salary = $60,000 at age 65

11

Social Security

Typical Public

Sector DB

Employee Contributions?

Employer Contributions?

Required ParticipationParty Responsible for

Paying Benefits

Benefits Payments Term

Survivor Benefits Available?

Inflation-protected?

Yes Yes

Yes Yes

Yes Yes

US Gov’t Public Sector Employer

Lifetime Lifetime

Yes Yes

Yes Maybe

Strength of “Stool Leg” StrongestIt

Depends

Comparison of “Strength of Stool Legs”

Benefit Maximization Strategy

Paying FICA taxes for 35

years

Long career with Employer

12

Combined End-of-Career Pay Replacement from Social Security and Typical State/Local DB

Years of State/Local Gov't Service5 10 15 20 25 30 35

End of Career Pay

$30,000 49% 57% 64% 72% 79% 87% 94%

$40,000 45% 52% 60% 67% 75% 82% 90%

$50,000 42% 49% 57% 64% 72% 79% 87%

$60,000 40% 47% 55% 62% 70% 77% 85%

$70,000 38% 46% 53% 61% 68% 76% 83%

$80,000 37% 45% 52% 60% 67% 75% 82%

$90,000 36% 43% 51% 58% 66% 73% 81%

$100,000 34% 42% 49% 57% 64% 72% 79%

13

Short-Term Employee

Long-Term Employee

Contributes to DC

Doesn’t Contribute to DC

Will have all three legs of stool…Social

Security, Pension and Individual

Retirement Savings

Will only have one leg of

stool…Social Security

Will have two legs of stool…Social Security and Individual

Retirement Savings

Will have two legs of stool…Social Security

and DB pension

One of my favorite “four-boxes”14

So, where do public employees stand?

Low earners and long-service employees will get the most replacement

High earners will need long service to get high replacement because Social Security will top out for them

So, two groups then, high earners and those with short government service need to aggressively participate in their defined contribution plans

15

Retirement Income

Social Security

Personal Savings and Investments

Typical State/Local

Gov’t Pension

Public employees are in a great position to take advantage of all three legs of the stool…

But they have to know where they stand…

16

17

THANK YOU!!!

Rich HarrisDenver Employees Retirement PlanRharris@derp.org(720) 723-2742

Creating Valuable Benefit Plans for Public Sector Employees.Presented by:Glenn Sherman, Vice President, Retirement Plans, ICMA-RC

June 2, 2015

19

Today’s Focus

Creating valuable benefit plans for employees

Educating employees and encouraging participation

Helping employees help themselves

Investing for retirement

Developing a retirement income strategy

Continuing engagement with retirees

20

Creating Valuable Benefit Plans for Employees

Employees taking on more responsibility Prevalence of Defined Benefit pension slowing being eroded

Particularly for future public sector employees Future of Social Security benefits uncertain Increasing reliance on employer-based savings plans (e.g., 457

Deferred Compensation, 401 Defined Contribution) The only leg of the “three-legged stool” individuals can

control Crucial component for public sector employees

How do we create employer-based savings plans that will truly benefit employees?

21

Helping Employees Help Themselves

Make things easy for employees!

Simpler is better

Avoid information overload

Online and mobile access is the way of the future Enrollment Contribution changes Withdrawals

Automatic enrollment Sometimes we all need a little push Growing prevalence in the private sector; yet to take off in public

sector

22

Using Automatic Enrollment to Increase Participation

Select a “realistic” default contribution amount

Automatically increase contributions each year Sometimes we all need a little push

In addition to new hires, consider automatically enrolling current employees

Employees have ultimate control Stop participating at any time

Account balance refundable within first three months of enrollment

Change contribution amount and investment allocation at any time

23

Educating Employees and Encouraging Participation

Employer education and support is vital to plan success

Be an advocate for the plan, not a “bystander” Create plan awareness

Ensure relevant participant education

Promote “success stories” of older employees and retirees New employees often trust and respect the opinions of older and

more experienced co-workers

Change the mindset “Supplemental” plans must be viewed as crucial components of

an employee’s retirement income strategy, and not an afterthought

2424Confidential and Proprietary 24

Create Relevant Participant Education

Life Stage

Online/Multimedia Group Seminars Publications Individual Meetings

To enhance the effectiveness of your education program, provide information through multiple channels and avoid a “one size fits all” approach.

25

Investing for Retirement

Diversification is key

Keep things simple – Beneficial for many employees Offer single fund/service solutions that provide appropriate

diversification Target-Date Funds Target-Risk Funds Managed Accounts

Offer choices for do-it-yourself investors

26

Investing for Retirement

Target-Risk Funds

Target-Date Funds

Managed Accounts

Asset diversification Takes age into

account ⧠ Takes risk

tolerance into account

⧠

Asset allocation shifts over time ⧠ Considers other

assets and income ⧠ ⧠

Additional fees ⧠ ⧠

27

Developing a Retirement Income Strategy

Lifetime income is the key

Keep things simple – Beneficial for many employees Offer single fund/service solutions that provide appropriate

diversification and generate retirement income Retirement Income Funds Managed Accounts (In-Retirement) Guaranteed Monthly Withdrawal Benefit (GMWB) Funds

Convert defined contribution plan balances into defined benefit “type” retirement income

Do-it-yourself investors can create their own discretionary retirement income stream

28

Developing a Retirement Income Strategy

Retirement Income Funds

Managed Accounts (In-

Retirement)

GMWB Funds

Asset diversification Designed to

generate retirement

income over life expectancy

Payments guaranteed over

lifetime⧠ ⧠

Considers other assets and retirement

income⧠ ⧠

Additional fees ⧠

29

Continuing Engagement with Retirees

Retiree education by plan provider increasingly important Ensure retirees have access to information needed to

successfully manage finances in retirement Relationship/outreach doesn’t end at retirement

Pursue forward looking efforts to strengthen income component of employer-sponsored plans and mitigate longevity risk Solutions to convert defined contribution balances into defined

benefit “type” income Combine traditional defined contribution payouts with longevity

insurance to protect against outliving assets

Click icon to add picture Click icon to add picture Click icon to add picture

Developing a Comprehensive Benefit Strategy— Health Benefits

Presented to GFOA 2015 Annual Conference by:

J. Richard JohnsonSenior Vice President, National Public Sector Health Practice Leaderrjohnson@segalco.com

June 2, 2015

Copyright © 2015 by The Segal Group, Inc. All rights reserved.

31

Few, if any, Federal regulations governing public sector health benefit plans

Benefits designs and employer subsidies have fattened over time in place of direct pay increases

Hire to grave benefit promises

Retirees are rated as part of overall group, so their base premium rates are understated to actual cost

Employees and retirees are sheltered from having to make detailed choices among cost, coverage, networks, accessibility

Management of benefits access and service steerage usually stops short of patient coercion

No taxability issues for employers or plan members

Public Employers/Employees Have Had It Easy

32

Health Care Reform places new and increasingly more stringent requirements onto public sector health plans

The Federal Government is now a player in every state and local jurisdiction health plan.

Medicaid now impacts more employees and dependents

Public employers have had to make significant changes to their health plan eligibility rules and/or workforce composition

An individual now has the ability to buy individual insurance without pre-existing conditions outside of an employer health plan

Public plans have a new competitor (state marketplaces) that may eventually be more cost effective for some groups

Why it’s different now and for the future

The Playing Field Has Changed!

1

2

3

4

5

6

33

The Floor – Federal law now mandates public sector employers and plans to provide a minimum level of benefits

The Ceiling – By 2018, the 40% Excise Tax imposes an effective maximum on pre-tax health benefits· Increasing clamp on the richness of employer provided health benefits· Combined with reduced health care spending account cap

The Delivery Vehicle – State health insurance marketplaces provide a new delivery vehicle for both individual and employer sponsored health insurance· Standardized benefit levels will increasingly become the norm for defining health

benefit choices · Smaller private employers will ultimately use the SHOP exchanges as the most

efficient way to offload health benefit administration as a required employment tax

The Safety Net – Medicaid is now a factor for lower paid employees and their dependents, as well as for retirees

Threshold Changes

34

No longer just “How well can we manage health plan costs?” but now “How long can we keep doing what we’ve been doing?”

How will we maximize federal health benefit subsidies to ease our budgetary issues while trimming benefits to avoid excise tax penalties?

How will we attract new employees who are settled into health exchange coverage and no longer consider health benefits an employment motivator?

How can we maintain generational equity and balance among stakeholders with the large influx of retiring Baby Boomers?

Big Issues Public Employers Must Address

34

35

How will we realign our retiree health benefit promises to send the right message for the future?· Social Security Normal Retirement Age

continues to increase· Public sector retirement and health benefit

plans encourage early retirement· Economic needs encourage longer

employment just to keep subsidized health benefits

· Early retirees can now qualify for subsidies on the state health exchange even if eligible for employer plans

Big Issues Public Employers Must Address

35

36

The population keeps aging (Older = Sicker = Costlier)

The cost of health care keeps rising faster than inflation

Life expectancy is still increasing

More seniors are having to go back to work to make ends meet, even with retirement benefits

And Don’t Forget the Environmental Factors

36

37

Why Do People Work for Government?

In the Past… Now…

Health benefits have changed from an attractive perk to a major reason for government employment

1 Public service

Stability of employment

Retirement benefits

Work environment

Compensation

Health benefits

2

3

4

5

6

1Health benefits

Stability of employment

Work environment

Retirement benefits

Public service

Compensation

2

3

4

5

6

38

Retiree Health Benefits Are Under Attack

Public and private

exchanges

Medicare Advantage /

Medicare Part DPlan availability

reductions

Reduction in employer provided subsidy

Eligibility cut backs

OPEB cost and liability reduction

ACA requirements for employer group

health plans

Benefit reductions to

avoid 40% Excise Tax

39

Medical inflation is higher than general inflation· Medical plan increases based on a higher trend than any retirement COLAs· COLAs are vanishing or being limited

Increasing share of a retiree’s fixed pension benefit goes to pay for health benefit coverage

Medicare helps starting at age 65, but not a free ride

Average couple retiring at age 65 now will need $220,000 or more to pay for their health care costs during retirement.1

· Even after Medicare coverage· Does not include nursing home costs

How Health and Retirement Benefits Interact

1 Fidelity Viewpoints, June 11, 2014

40

Health Benefits

Divide and conquer - separate plans for actives and retirees· Specifically designed for their needs· Medicare Advantage / Medicare supplement / Private exchange· Public exchange for early retirees – possibly allows them to get federal subsidy· Reduce OPEB liability· Lower premiums for actives

Clean up your act· Eliminate unnecessary benefits – perks or drains?· Think voluntary coverage

Promote Wellness – both Physical and Financial · Health fairs are fun, but… · Financial planning may be more beneficial to employees in the long run

Develop a Comprehensive Benefit Strategy

41

Target the communication to the audience· Size up your population

– Demographics– Job environment – Desk or street? Factory or think tank?

· Different people learn differently· To be effective, must have

– Different messages (even if the same plans)– Different emphasis for different groups and ages– Different channels– Multiple channels

Present benefits as a package – always!· Retirement – Health – Work Environment – Pay· Develop common branding across all benefit types – and use it!

Develop a Comprehensive Benefit Strategy - 2

42

Take the employee/retiree viewpoint in making decisions on benefit changes and costs· What percent of take home income does the employee/retiree spend now on

health and retirement benefits?· Can the employee or retiree afford the premium increase?· Will the copay or deductible increase cause lower paid workers to avoid seeking

necessary care?· What’s the five-year horizon of expected employee/retiree cash outlay for the

change?· Will there be pay adjustments / COLAs to help offset the additional plan cost?

Show detailed examples of real people situations· Helps employees/retirees relate and understand their choices across plans

Develop a Comprehensive Benefit Strategy – 3

43

Get all the decision makers together· Talk overall financial stream in career and retirement· Promote a common understanding · Accountability across departments/agencies

Develop an overall strategy· Start simple and don’t overdo too early

Focus on the important things· First on affordability for the employee/retiree· Then on what the employer must provide· Then on what you can provide within budget· Know and monitor all three factors each year· Use them as a yardstick in assessing possible changes

Decisions won’t be easy, but it helps to have a common vocabulary and measurement standards

How to Begin

44

On the Segal Website:

Health Reform Resources

Health Care Reform Timeline Health Care Reform Insights Stat! Bulletins Public Sector Letters Webinar recordings and slides

Health Reform Resources: http://www.segalco.com/publications-and-resources/health-care-reform/

Rick JohnsonSenior Vice President rjohnson@segalco.com212.833.6470 www.segalco.com

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