In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment.
TYPES OF PENSIONS PLANS:
DEFINED BENEFIT PLAN
DEFINED CONTRIBUTION PLAN
DEFINED BENEFIT PLANDEFINED BENEFIT PLANDEFINED BENEFIT PLANMONETARY CONTRIBUTION INVESTMENT RISK
EMPLOYER X X
EMPLOYEE X
• RETIREE RECEIVES A PREDETERMINED AND GUARANTEED BENEFIT BASED ON SALARY AND YEARS OF SERVICE.
• MOST PLANS INCLUDE A DEATH AND DISABILITY BENEFIT.
• THE PLAN IS PRE-FUNDED - IT RECEIVES ROUTINE CONTRIBUTIONS FROM THE EMPLOYER AND OFTENTIMES THE EMPLOYEE DURING THE COURSE OF EMPLOYMENT.
• INVESTMENT EARNINGS DO A SIGNIFICANT AMOUNT OF THE WORK OF PAYING FOR RETIREMENT BENEFITS.
• THE CONTRIBUTIONS ARE INVESTED BY PROFESSIONAL MONEY MANAGERS.
• A PENSION BOARD OF TRUSTEES IS RESPONSIBLE FOR MAKING DECISIONS REGARDING THE PLAN.
DEFINED CONTRIBUTION PLANDEFINED CONTRIBUTION PLANDEFINED CONTRIBUTION PLANMONETARY CONTRIBUTION INVESTMENT RISK
EMPLOYER X
EMPLOYEE X X
• EMPLOYER PROVIDES EMPLOYEE WITH AN INDIVIDUAL INVESTMENT ACCOUNT.
• THE EMPLOYEE HAS OWNERSHIP OF THE ASSETS IN THE PLAN AND DECIDES HOW THE MONEY IS INVESTED.
• AT RETIREMENT, THE EMPLOYEE’S BENEFIT IS PAID SOLELY OUT OF THE CONTRIBUTIONS AND INVESTMENT EARNINGS THAT ACCUMULATED IN THE ACCOUNT.
• MANAGEMENT FEES ARE PAID OUT OF THE ACCOUNT.
• THE EMPLOYER HAS NO FINANCIAL RESPONSIBILITY FOR THE EMPLOYEE AFTER RETIREMENT.
• THE EMPLOYER BEARS THE ENTIRE MARKET RISK.
•Governments began offering Public Employee Pensions almost 2 centuries ago.
GOVERNMENTS MADE A PROMISE TO PUBLIC EMPLOYEES
PUBLIC EMPLOYEES EARN LESS MONEY THAN THEIR
PRIVATE SECTOR COUNTERPARTS
• In order to attract a quality workforce, governments offered guaranteed retirement benefits to protect the employees and family members in their retirement years.
SOCIAL SECURITY
INITIALLY EXCLUDED PUBLIC SECTOR
EMPLOYEES. ALTHOUGH AMENDED,
70% OF ALL FIRE FIGHTERS REMAIN OUTSIDE THE
SOCIAL SECURITY SYSTEM, DEPENDENT ON STATE
AND LOCAL RETIREMENT SYSTEMS.
CONSEQUENTLY, IN LIEU OF SOCIAL SECURITY, PROGRESSIVE STATE AND LOCAL GOVERNMENTS BEGAN INSTITUTING OR IMPROVING PENSION BENEFITS FOR PUBLIC EMPLOYEES.
•Normal Retirement Date
•Age Requirement
• Years of Service
• Social Security: Yes or No?
• Employer’s Contribution
• Employee’s Contribution
• Early Retirement
•Date Vested
•Annuities, Formulas, COLA
•Death & Disability Benefit
THE SUMMARY PLAN DOCUMENT
MYTHS & MISPERCEPTIONS
• MYTH: DEFINED CONTRIBUTION PLANS ARE BETTER BECAUSE THEY ALLOW EMPLOYEES TO MANAGE RETIREMENT ASSETS THEMSELVES. WORKERS WANT A DEFINED CONTRIBUTION PLAN AS THEIR PRIMARY RETIREMENT BENEFIT.
• MYTH: WORKERS IN DEFINED CONTRIBUTION PLANS WILL RECEIVE SUBSTANTIALLY HIGHER BENEFITS THAN THOSE OFFERED BY DEFINED BENEFIT PLANS.
• MYTH: THE PUBLIC SECTOR SHOULD CONVERT TO DEFINED CONTRIBUTION PLANS, AS THE PRIVATE SECTOR HAS BECAUSE THEY COST LESS THAN DEFINED BENEFIT PLANS.
WE BELIEVE THAT A DEFINED BENEFIT PLAN
SHOULD CONSTITUTE AN EMPLOYEE’S BASIC RETIREMENT
PLAN, AND SHOULD BE SUPPLEMENTED BY A VOLUNTARY DEFINED CONTRIBUTION PLAN.
DEFINED BENEFIT DEFINED CONTRIBUTION
DEFINED BENEFIT PLANS PROVIDE SECURE RETIREMENT BENEFITS BASED ON A
PERSON’S SALARY AND PERIOD OF SERVICE.
SWITCHING TO A DEFINED CONTRIBUTION PLAN IS LIKELY TO RESULT IN LOWER AND LESS SECURE RETIREMENT BENEFITS. STATE
AND LOCAL EMPLOYEES WHO ARE WITHOUT SOCIAL SECURITY WOULD BE
PUT AT EVEN GREATER RISK.
DEFINED BENEFIT PLANS PROVIDE RETIREES WITH A GUARANTEED FIXED MONTHLY BENEFIT
RETIREES WITHOUT A GUARANTEED FIXED MONTHLY BENEFIT ARE LESS LIKELY TO SPEND ON GOODS AND SERVICES
IF A RETIREE OUTLIVES THEIR RETIREMENT SAVINGS, THEY ARE MORE LIKELY TO NEED GOVERNMENT ASSISTANCE
DEFINED BENEFIT PLANS HELP SUSTAIN STATE AND LOCAL ECONOMIES BY PROVIDING ADEQUATE AND STEADY RETIREMENT BENEFITS FOR A SIGNIFICANT
PORTION OF THE WORKFORCE.
SWITCHING TO A DEFINED CONTRIBUTION PLAN MAY SLOW STATE AND LOCAL ECONOMIES, SINCE A LARGE NUMBER OF RETIREES WOULD LIKELY RECEIVE LOWER
RETIREMENT BENEFITS.
DEFINED BENEFIT PLANS PROVIDE BENEFITS THAT HELP ENSURE AN ADEQUATE STANDARD OF LIVING
THROUGHOUT RETIREMENT.
SWITCHING TO A DEFINED CONTRIBUTION PLAN WOULD RESULT IN PRESSURE ON STATE AND LOCAL
GOVERNMENTS TO AUGMENT DEFINED CONTRIBUTION PLAN BENEFITS AND REQUIRE INCREASED FINANCIAL
ASSISTANCE FOR RETIREES.
DEFINED BENEFIT DEFINED CONTRIBUTION
ALMOST ALL STATE AND LOCAL DEFINED BENEFIT PLANS PROVIDE
DISABILITY AND SURVIVOR BENEFITS AS WELL AS RETIREMENT INCOME.
SWITCHING TO A DEFINED CONTRIBUTION PLAN WOULD REQUIRE EMPLOYERS TO OBTAIN THESE BENEFITS FROM ANOTHER SOURCE, LIKELY AT A
HIGHER COST.
DEFINED BENEFIT DEFINED CONTRIBUTIONDEFINED BENEFIT PLANS ENHANCE THE ABILITY OF
STATE AND LOCAL GOVERNMENTS TO ATTRACT QUALIFIED EMPLOYEES AND RETAIN THEM
THROUGHOUT THEIR CAREERS
SWITCHING TO A DEFINED CONTRIBUTION PLAN WOULD LIMIT THE EMPLOYER’S ABILITY TO ATTRACT A
QUALIFIED WORKFORCE AND INCREASE EMPLOYEE TURNOVER RATES.
DEFINED BENEFIT PLANS EARN HIGHER INVESTMENT RETURNS AND PAY LOWER INVESTMENT
MANAGEMENT FEES, ON AVERAGE.
SWITCHING TO A DEFINED CONTRIBUTION PLAN IS LIKELY TO LOWER INVESTMENT EARNINGS USED TO
FINANCE RETIREMENT BENEFITS AND INCREASE MANAGEMENT COSTS.
• THERE ARE LAWS GOVERNING PUBLIC PENSION PLANS THAT PROTECT PENSION BENEFITS FROM BEING REDUCED.
• PENSION BENEFITS CURRENTLY PROMISED TO STATE AND LOCAL EMPLOYEES MAY NOT BE ABANDONED.
• DEFINED CONTRIBUTION PLANS ARE COSTLY TO ESTABLISH AND MAINTAIN.
• WHEN GIVEN THE OPTION, MOST EMPLOYEES REMAIN IN THE DEFINED BENEFIT PLAN.
• EVEN WHEN NEW HIRES ARE REQUIRED TO JOIN THE DEFINED CONTRIBUTION PLAN, LONG-TERM SAVINGS FOR EMPLOYERS ARE UNCERTAIN AND MAY TAKE MANY YEARS TO REALIZE.
• SWITCHING TO A DEFINED CONTRIBUTION PLAN WOULD REQUIRE EMPLOYERS TO OBTAIN DISABILITY AND SURVIVOR BENEFITS FROM ANOTHER SOURCE, LIKELY AT A HIGHER COST.
$$$$ COSTS OF SWITCHING PLANS $$$$
DO DEFINED CONTRIBUTION PLANS REALLY OFFER PARTICIPANTS THE OPPORTUNITY TO AMASS
CONSIDERABLE WEALTH ?
• Among participants whose primary retirement benefit is a defined contribution plan, some will, in fact, receive substantially higher benefits than they would under a defined benefit plan. However, many workers will fare worse under a defined contribution plan, and some defined contribution plan participants will have no retirement assets at all.
• In fact, retirement benefits paid from defined contribution plans are significantly less than those paid from defined benefit plans. The U.S. Congressional Research Service found that, for current older workers, defined contribution-type plans will provide annual benefits of less than $5,000 for half the workers. This is little more than one-quarter of the $21,800 average annual benefits currently paid by governmental defined benefit plans to state and local workers.
AN IDEAL RETIREMENT MIX
VOLUNTARY DEFINED CONTRIBUTION PLAN
& SAVINGS
SOCIAL SECURITYDEFINED BENEFIT PLAN
FINANCIAL PLANNERS HAVE LONG REFERRED TO AN IDEAL MIX OF RETIREMENT INCOME SOURCES AS A
“THREE-LEGGED STOOL,” WITH ONE LEG EACH REPRESENTING SOCIAL SECURITY, PERSONAL SAVINGS,
AND AN EMPLOYER PENSION.
X70% OF RETIRED
FIREFIGHTERS DO NOT RECEIVE SOCIAL
SECURITY
MOST PUBLIC PENSION
SYSTEMS ARE GOVERNED BY A BOARD OF
TRUSTEES
What is in the best interest of the system and the plan
participants?
PLAN ASSETS(PENSION FUND)
PLAN LIABILITIES
Fair Value at Start of Year(+)Return on Plan Assets
(+) Employer Contributions(-) Benefits Paid
= Fair Value of Plan Assets at end of year
Liabilities at Start of Year(+) Service Cost(+) Interest Cost
(+/-)Actuarial Gain/Loss(+/-) Plan Gain/Loss
(-) Benefits Paid or Owed= Liabilities at end of year
↵ ↵Difference is the funded status of the plan:Plan Assets > LIABILITIES = Overfunded PlanPlan Assets < LIABILITIES = Underfunded Plan
ALABAMAALASKA
COLORADOCONNECTICUT
HAWAIIILLINOISINDIANAKANSAS
KENTUCKYLOUISIANAMARYLAND
MASSACHUSETTSMISSISSIPPINEVADA
NEW HAMPSHIRENEW JERSEYOKLAHOMA
RHODE ISLANDSOUTH CAROLINA
WEST VIRGINIAWYOMING
21 STATES WERE FUNDED BELOW THE 80% LEVEL
FLORIDANEW YORK
WASHINGTONWISCONSIN
4 STATES WERE FULLY
FUNDED 2008 STATE PENSION FUNDING LEVELS