The Countys Plans to Add a Defined Contribution
The County’s Plans to Add a Defined Contribution Option for New Hires Its Impact on Your Current Retirement System Presentation To AGENA Members July 21, 2011, as updated August 1, 2011 Diane Burkley Alejandro Retirement Security Consultants, LLC
THE CONCERN: The County Manager wants to set up a Defined Contribution (DC) plan as an “option” to the existing Defined Benefit (DB) pension, currently for new hires. HR formed an employee workgroup which is crafting the details. The change could add unnecessary, and potentially significant, risk to our retirement system. Issues: • • • What is a DC plan? The good and the bad with DC plans. HR’s use of Workgroup to add legitimacy. If it is just for new hires, who cares? What AGENA has done and can still do. What AGENA members can do. 2
What is a DC Plan DC PLAN • Contributions go into an individual account. • Worker invests money. • Examples: 401(k), 401(a) and 457 plans. • You get what is in the account when you retire. If you leave early, you get it then. • Can run out of money: balance gets lower withdrawals and investment losses. DB PLAN • Retiree gets a “defined” benefit (based on salary and years worked). • Benefit provided for life (an annuity). Doesn’t run out. • Inflation protection (COLA) provided. • Professional managers invest money. • Employer bears investment risk. • You get promised benefit, no matter what happens to trust’s balance. WHAT ARLINGTON HAS NOW • DB plan based on 1. 7% salary X years worked. Annuity with option for partial lump sum. • Supplemented by 401(a) and 457 plans. County contributes 4. 2% of salary to these. 3
Who likes DCs and Why • Why some workers like DC – Increased portability for short-termers. – Second career workers who don’t need another pension. • Why employers like DC – They no longer bear investment risk. – Costs less (though not necessarily…). – More predictable costs. 4
AGENA’s Concerns with DC Plans • Private Sector: It hasn’t worked – Time Magazine: DC plans are “a lousy idea, a financial flop, a rotten repository for our retirement reserves. ” – Fidelity Investments: Workers with DCs nearing retirement “are consumed by fear. ” – Nyhart (HR’s own consultant): Average worker with DC must work until he is 73 years old to have enough money. • Public sector: It hasn’t worked – Nebraska closed its DC plan after 30 years experience, saying it was a “waste of taxpayers’ money. ” – • West Virginia was forced to let workers switch back into the DB plan because of the poor returns in the DC plan. 80% did so. Our DB is Healthy – 95% funded. Excellent returns. • DC: It’s really a Benefit Cut – The same contribution buys less in a DC plan than a DB plan. – Despite protests, HR documents show a key goal is to save money, meaning smaller County contribution to DC than DB, and lower DC benefits. – Costs of combined DC/DB plan can sometimes be more expensive than straight DB plan. 5
The Risk: Not Enough to Retire WHAT WORKERS ACCUMULATE • • • What you need: Many experts say you need 11 times your pay to cover expenses through retirement. Theoretical average savings: 5 -6 times salary over career. HR’s projections reflect this. Actual average earnings: 2 times salary. WHY DC SAVINGS • • • INDC PLANS ARE LOW Lack of financial expertise. Not professional investors like DBs. Earn 1%-5% less per year. Short term focus. Near and during retirement, assets shifted to “safer” investments. Timing Risk/Down Market. DC plans lost 30% of their value in 2008 alone. Leakage: Used as “rainy day account. ” 50% workers cash out account when they leave job. No inflation protection. Unlike DB, account balance isn’t increased each year by COLA. Impact on average Arlington worker • • Average Annual DB Benefit: $21, 250 per year increased with COLA (25 years service, age 62, $50, 000 salary). Typical DC Benefit: $100, 000 to spread over retirement (2 times $50, 000 salary). – Likely run out in less than 6 years. – Life expectancy: 20+ years. 6
What this means for Average Arlington Worker DB payout DC $150, 000 payout 20 th 19 th 18 th 17 th 16 th 15 th YEARS SPENT IN RETIREMENT 14 th 13 th 12 th 11 th 10 th 9 th 8 th 7 th 6 th 5 th 4 th 3 rd 2 nd 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 -10 -20 Beginning of Year Balance, in Thousand Dollars 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 -10 -20 1 st HOW LONG WILL AN AVERAGE ARLINGTON WORKER'S DC AND DB FUNDS LAST? DC $100, 000 payout © Diane Burkley Alejandro 2011. . DB payout based on Arlington's 1. 7% multiplier, 25 years service, $50, 000 salary & 3. 5% COLA. DC assets shown at 2 and 3 times’ salary, and are assumed to grow at 5%. This is optimistic; an appropriate benchmark, the Lipper Mixed Asset Target 2010 Fund, returned 3. 43% annualized over last 10 years. 7
The Retirement Sustainability Workgroup • Ever since the County enhanced pension benefits in 2009, it has tried to add a DC alternative. See Appendix. • AGENA successfully opposed CM’s efforts to date. • May 26, 2011: HR sets up a “Retirement Plan Sustainability Workgroup” to develop an “alternate” retirement plan. • Workgroup structured to ensure a DC option is developed. • A majority of Workgroup members said they approve of adding a DC option of some form. – Member polling occurred when 2 out of 4 General Employee members gone from meeting. • Recommendation to CM likely in August. • CM must then get actuarial impact study. • Proposal to CB to follow. CM would like it adopted by end of 2011. 8
AGENA’s Concerns with Workgroup • Workgroup composition skewed • Needed tasks are skipped • Limited information provided – No hard copies of any actuarial projections of impact on retiree provided until after DC plan gained tentative endorsement. – HR’s actuary’s projections based on unrealistic assumptions. – Financial impact report on current DB plan still not provided. – ACERS’s actuary wasn’t even told why they were asked to meeting. • Meaningful questioning of experts limited – AGENA consultant not permitted to ask questions; now excluded altogether. – Employee substitutes restricted to “observing. ” – 5 of 10 members are from HR, senior management or DMF. – 1 public safety representative included and can vote, even though their benefits likely addressed separately. – Line employees make up 95% of general workforce but only 40% of Workgroup (4/10: Myriam Jurado for AGENA, Richard Curley for AFSME, Henny Tejada for Allianza & Jon Distler from DTS). – Suggested revisions to misleading mission statement and minutes ignored. – HR refuses to allow ACERS’s actuary to prepare impact analysis until after Workgroup is finished— and may try to change Retirement Code so it can use its own actuary. – Promised follow-up on key issues delayed. 9
Design Issues Still Open • New Hires only? – County Manager is now on record stating this is her intent. – But what about future expansions? • General employees or just MAP (senior management)? – Likely offered to all general employees. • Employee contribution required? – Workgroup members inclined to require, which is preferable. – HR earlier advised us no employee contribution might be needed, which could induce workers to pick DC over DB. – If no employee contribution required, lower income workers in need of cash would have added incentive to choose DC, yet they are most likely to be harmed by switch. • Do-over permitted? – Can worker switch back to DB? • Percent of pay contributed? – Likely 10% (8%-15% possible). Breakout between employee and employer not decided. 10
Why Should You Care? “It only affects new hires” “It’s only an option; choice is good” • Retirement Insecurity of DC Workers – Most workers who choose the option will have smaller retirement benefits. – Many think they can do better than professional managers; most do far worse. – Can end up not retiring, or on the public dole. • The Slippery Slope – Even if initially limited to new hires, there is ample precedent to expand. Ø Code amendment adopted in November 2010 by its terms authorizes a DC option for all senior management (MAP), not just new hires. Ø CM proposed expanding option to all current workers in 2009 (unsuccessfully). – Once DC plan is in place, stark contrast between costs of DC and DB can be used to justify freezing or scaling back DB plan. Ø Does CB want to spend 6 -10% of pay (DC) or 15 -30%of pay (DB, current and projected)? Ø HR documents show cost savings is a key reason for change. – Addition of DC plan increases normal costs of DB plan, making future comparison even worse. – Younger workers now subsidize older workers in DB; take them out and DB cost per employee rises. • DB could Be Deemed “Unsustainable” in the Future, Especially During Stock Market Downturns. 11
Strategy Options AGENA Can Consider • Continue efforts to get meaningful information to Working Group. – Seek consideration of non-DC options to address portability concern raised by HR. • Seek to contain scope of any DC plan and include “best practices. ” • Commission own actuarial study. • Work with Cheiron (ACERS actuary) to ensure impact study prepared for DC option covers needed issues. • Work with County Board members. • Educate the press. • Strong opposition at CB meetings if unacceptable plan put forward. • If DC plan adopted, educate general employees of risks before they make a choice of plan. 12
What AGENA Members Can Do • Educate yourselves and other general employees. • Talk to workgroup members and AGENA team. • If the situation doesn’t improve: – Petition drives? – Letter writing campaigns? – Show of force at hearings? 13
APPENDIX County’s Efforts to Add a DC Option and AGENA’s Response • • • January 2009: County implements enhancements to pension plan. – Benefits multiplier increased from 1. 5% to 1. 7%, including for prior service. – Reasons given by County Manager for change: • Make benefits more competitive with neighboring local governments • Addressing career workers’ “expressed preference: for enhanced DB plan rather than DC plan”. • Offset changes in retiree health care that shifted costs to retirees. October 2009: County proposes letting employees opt-out of DB plan and into a DC plan. – Applied to all employees, not just new hires or senior management. – CM said it was needed to attract private sector and 2 nd career workers. – AGENA objected because of harm to retirement security. – County Board rejected it and told CM to consult with workers. November 2010: CM quietly proposes letting senior management (MAP) employees optout of DB plan and into a DC plan. – Description says it applies to new hires, but actual Code language applies to all MAP employees. – Timing: while general employees focused on election of ACERS Trustee. – CM memo said employee groups had been consulted and “no longer opposed change. ” This was not true. – Passed as consent item (no public discussion). – Action on hold because AGENA notified County that action was illegal due to failure to follow Code procedures for adopting amendments. CM had used paid consultant to advise CB on effects of change instead of ACERS’ independent actuary as required by Code (§ 46 -9). 14
APPENDIX Background continued • January 2011: CM proposes to expand DC option to all newly hired workers. – – • • Negative press other DB plans get for expense and funding. • May lower costs for County. • Provides a portable benefit; more competitive with private sector. Due to AGENA objections, proposal was withdrawn. • Pension Issue Brief provided to CB members • AGENA meetings held with CB members. February 2011: CM tries to change Code so it can use its paid consultant to report to CB on proposed retirement changes instead of ACERS’ independent actuary. – • Reason given: Due to AGENA objections, CM withdrew proposed Code change. May 26, 2011: HR sets up a “Retirement Plan Sustainability Workgroup” to develop “alternate” retirement plan to “enhance” current system. 15
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