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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?