Mid-Atlantic Plan Sponsors (MAPS) Trustee Educational Conference June 9, 2011
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Transcript of Mid-Atlantic Plan Sponsors (MAPS) Trustee Educational Conference June 9, 2011
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Mid-Atlantic Plan Sponsors(MAPS)
Trustee Educational ConferenceJune 9, 2011
What Type of Retirement Plan Do You Want &Can You Afford It?
David Boomershine – Senior Actuary
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• Background – Retirement Plans• Types of Retirement Plans• Retirement Program Objectives• Cost Volatility Issues• Alternative Plan Designs• Retirement Benefit Comparisons• Cost Comparisons• Plan Comparison Summary• Current Public Sector Plan Changes – Questions?• DB to DC Plan Transition Issues• Other Current Issues
Agenda
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• Competitive• Attract employees• Tax break• Reward employees/employee appreciation• So employees can retire• Contribute to society
Background
Employers sponsor retirement plans – why?:
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Ideal employer sponsored retirement program:- Defined Benefit Plan (DB) – Base- Defined Contribution Plan (DC) – Supplemental
Combined program provides blend of security, flexibility for employees
Background
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Types of Retirement Plans
• Defined Benefit (DB) Plans- Lifetime benefit based on formula- Career average pay plan (ex. 1.0% of pay for each year of
service)- Traditional final average pay plan – recent significant issues
(ex. 1.5% of 5-year final average pay times years of service) Benefit accruals are “back loaded”
- Public Sector – typically includes employee contributions, on a pre-tax basis
- Employer has investment risk
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Types of Retirement Plans
• Defined Contribution (DC) Plans- IRC Section 457 Plan- Employee and/or employer contributions- Account balances grow with contributions and investment
income (gains and losses)- Employee has investment risk- Typical lump sum payout of account balance
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Types of Retirement Plans
• Hybrid Plans – Cash Balance (CB) Plans- Hypothetical account balance grows with contributions and
interest credits- Conversion to lifetime benefit at retirement- Lump sum can be paid out- DB plan with DC features- Benefit earned more evenly over career- Employer has investment risk
Note: in Public Sector, Hybrid Plan can also mean a combination of a DB Plan and a DC Plan
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Types of Retirement Plans
• General Plan Comparisons
DB Plans DC Plans Hybrid Plans
Lifetime retirement income Yes No Yes
Retirement income determinable Yes No Yes
Easy to understand No Yes Mixed
Portable No Yes Yes
Investment control and risk Employer Employee Employer
Level of paternalism High Low Mixed
Level of cost and liability volatility for Employer
High None Low
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• Retirement Program Objectives Summary
- Primary Objectives
• Competitive benefits
• Affordable benefits – within financial structure/budget
• Minimize cost and funding volatility
• Maintaining current benefit levels, as much as possible, for current employees
Retirement Program Objectives
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- Secondary Objectives
Creation of cost awareness and appreciation among employees
Attraction and retention of qualified personnel – especially certain skilled employees
Attaining maximum tax efficiency in delivering benefits
Encouraging benefit responsibility – employee sharing the cost of retirement financial security
Developing more choice – employee benefit control
Retirement Program Review
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Cost Volatility Issues – Pension Plans
• Cost Volatility Issues
- Concern about DB plan funding and accounting volatility due to fluctuations in:
Valuation interest rates; i.e. the interest rates used to value plan liabilities and costs to determine required cash contributions
Asset returns (i.e. Market Value of Assets); Plan costs and unfunded liabilities are directly affected as investment returns and asset values go up and down
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Alternative Plan Designs-Case Study
Sample Plans:
• DB Plan: Benefit Formula = 1.5% times final average pay times service, up to 35 years
• DC Plan: Employer contribution formula = 7% of pay plus 50% match of employee’s 1st
6% of pay savings
• CB Plan: Employer contribution credit = 10% of pay for each year of service
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Typical Benefit Accrual Patterns
35 45 55 65Age
(Hired at age 35)
DB
CB
DC
Acc
rued
Ben
efit
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Retirement Benefit Comparisons
• Sample employees representing a cross-section of active plan population
Profile Employee
Attained Age
Accrued Service
Current Compensation
I 30 2 $35,000
II 35 5 $40,000
III 40 9 $45,000
IV 45 12 $50,000
V 50 14 $55,000
VI 54 19 $60,000
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Retirement Benefit Comparisons
• Replacement Ratios: % of final pay replaced with lifetime pension benefits
Profile Employee
Attained Age
Accrued Service
Current Compensation
DB Plan
DC Plan
CB Plan
I 30 2 $35,000 51% 38% 42%
II 35 5 $40,000 51% 38% 42%
III 40 9 $45,000 49% 36% 39%
IV 45 12 $50,000 46% 34% 37%
V 50 14 $55,000 41% 30% 33%
VI 54 19 $60,000 43% 33% 36%
Actuarial Assumptions:- Mortality: RP2000 Table- Interest: 6%
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Cost Comparisons
As a % of payroll:
• DB Plan 8.5%
• DC Plan 9.0%
• CB Plan 8.0%
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Plan Comparison Summary
DB Plans are the most cost efficient method to deliver retirement benefits
- Retirement Benefits
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Plan Comparison Summary
Why are DB plans more cost efficient?
• Reward long service – back loading due to final average pay
• Forfeitures remain in plan – more with DB plans
• Younger terminations – similar to forfeitures
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Plan Comparison Summary
Conclusions of Case Study:
• For similar long-term plan costs, traditional DB plans provide about 130% of lifetime benefits provided by DC plans
• Other studies claim traditional DB plans provide up to 150% more in benefits for the same cost vs. DC plans
• Career average DB plans provide about 20% more in benefits for the same cost vs. DC plans
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Current Public Sector Plan Changes
Current Questions
• Not enough cost reduction?
• Cost/liability volatility concerns remain; especially vs. Private Sector?
• Future of economy?
• Changing workforce?
• More changes coming?
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Transition Issues
If converting from DB plan to DC plan, the following issues must be addressed:• Preservation of Accrued Benefits
- Projected Benefits?• DC Plan – better replacement of DB benefit
- Not match only- Not flat employer contribution- Service based employer contribution schedule- Example:
- Count past service- Add Match?
• Employee communications/education- Announcements/other print materials- Benefit comparison statements- Employee meetings
Years of Service Contribution %
<5 3.5%
5 -10 4.5%
10 – 15 6.0%
15 + 8.0%
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Other Current Issues
• Comparison vs. Private Sector Plans• Taxpayer concerns
- DB plans- OPEB plans
• Union reactions• Capping employer contribution commitment• Valuation Discount Rate Basis/Reduction?• COLA’s – DC plans
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Questions?