Last year, the Montana Legislature passed House Bill 90 which directed the interimcommittee, CPERS, to study the Public Employees' Retirement System (including itssupplemental 457 and 403(b) plans) and prepare recommendations for possible changes. Therequirements of HB 90 specified that the value of the PERS system should be assessed withrespect to the characteristics and goals of various parties of interest in the PERS, includingmembers, employers, PERS administrators and policymakers. HB 90 also directed thatCPERS develop recommendations which provide for: • increased portability of contributions • increased flexibility to allow plan members a choice in - selecting contribution amounts - directing investments and - selecting the form of benefit payouts and • a specified benefit in retirement.
The CPERS committee engaged, through public bid, Actuarial Sciences Associates to assistit with its tasks and provide three sets of options for modifying or replacing PERS and itssupplemental 457 and 403(b) plans (Report #1). After design alternatives are discussed, costand benefit analyses for members and the plan (Report #2) and implementation and educationplans (Report #3) will be considered.
This executive summary sketches the findings of Report #1. Report #1 is divided into threeadditional sections: • Process Summary and Focus Group Results • Assessment of Current System; and • Design Alternatives and Stakeholder Critiques. Because focus group discussions (as well as teleconference meetings) were the primarymechanism used to assess participant interests, much of the material relevant to theassessment of the current system is included in this section.
Process Summary and Focus Group Results
ASA conducted 12 focus groups in ten locations with employees covered by PERS. Thesefocus groups were designed to elicit and assess employees' goals and needs with respect toretirement benefits from PERS. ASA also conducted 6 employer focus groups withrepresentatives from state government and participating counties, cities, school districts, otheragencies and university employers to assess the relevant characteristics, goals, and fiscalsituations of the different participating public employer groups. In addition, ASA met withthe Public Employees' Retirement Board, representatives of employee organizations and theMontana CPERS to explore expectations of various parties from PERS. Focus group siteswere determined based on geographic regions covering both the eastern and western partsof the state. Invitations to attend focus groups were mailed directly to randomly selectedmembers chosen to represent a cross section of PERS membership based on age, sex, salary,service and type of employer. The primary objective of the focus groups was to determine the needs and goals of the various participant groups with respect to retirement benefits from PERS. In addition,certain other data was gathered on access and utilization of deferred compensation and otherretirement savings opportunities, preferred means of receiving information about the plan,administrative issues with respect to the plans and other items which might best be addressedin the context of a new plan design.
Key Findings The employee and employer focus groups represented a significant undertaking by CPERS. Focus group invitations were sent to about 3% of the total PERS active population. About1% of all members attended a focus group. Nevertheless, care must be used in generalizingthe results of the focus groups and surveys to the entire employee population. In particularthe results of the employee focus groups are likely more indicative of older employeeattitudes. To gain insight into likely attitudes of younger employees it is important to examinethe charts which show responses by age and service categories, and to compare employerresponses about goals of the general employee population with the employee responses.
The most common items brought up in the discussions were as follows:
Mandatory savings feature of the program isimportant
12
5
Additional portability of service
5
10
Employees had widespread concern over the issue of any changes to the system. In contrast, while employers also raised the issue it did not dominate discussions in the same manner as in the employee sessions. In particular, employees attending the focus groups expressed overwhelming concern that changes to the system will affect them adversely; many do not want to see the current benefit program endangered in any way in order to provide additional flexibility to new and future members.
Using the surveys that were distributed at the meetings, we are able to view differences inemployee attitudes by various demographic characteristics. Key indicators appear to beservice and type of employer. Shorter-service employees show relatively greater interest inportability of benefits and ability to direct investments than other employees. While stillinterested, shorter-service employees are relatively less concerned with automatic benefitincreases and guaranteed levels of benefits.
Employers attending the focus groups represented city, county, state central payroll, otheragencies, school districts and universities. The following distinguishing features of thedifferent employer types were clear:
School district and university employers have a very different perspective on PERS than other employers. This is in large part because the majority of the professional staff of these employers are covered by other plans. Part-time issues were of particular importance to this group, including the complexity of administering catch-up provisions for part time employees entering the plan.
School district, university, city and county employers appeared to face a fairly stable employment picture, but state and local agency employers were much more concerned with changes in employment skills or in the size of the workforce needed. Portability was a significant concern for agencies, state and university employers. Few employers believe that the particular design of the pension plan is a significant factor in employee recruitment (more important is that a plan exists), but many employers find the plan useful in retention.
Local employers do not see any room in budgets to bear any increased costs that could occur with a plan change.
Most employers would like to see similarity between plans that cover different types of workers. In particular, differences between PERS and the Teachers Retirement System were commented on.
Employers see significant value in adding investment direction and control to the plan, and in giving increased ability to transfer service credit between PERS and other employers, while viewing the guarantee features of the plan as much less significant than did employee respondents.
Assessment
The Assessment section largely references Focus Group results for employees and employers. These results identify points of satisfaction and dissatisfaction with the current PERS structure as well as general issues of employment and public policy.
In addition, the Assessment section identifies stated purposes and goals of the PERS systemby the system's Board of Trustees. The Board of Trustees describes the basic purpose of theretirement system as one which is to provide a secure and predictable component andfoundation level of income for retired members. To facilitate this purpose and protect theinterests of plan participants, Constitutional provisions concerning actuarial soundness of thefund, handling of the assets and conduct of its fiduciaries have been established.
The Board has expressed interest and support for processes which gather information on planparticipant goals and interests, but reserves comment on general design and funding issuesinvolving public policy issues. Evaluation of specific legislative proposals are guided by policypapers which emphasize the need for sufficiency of benefits, actuarial soundness, benefitsecurity and equity of benefit distribution among members. Other board concerns are listed.
Legislative sentiments have been gleaned from representative comments made in CPERSmeetings. A broad range of policy concerns reflects the Legislature's role as plan sponsor.Legislative and budget responsibilities combine to give the Legislature plan design reviewobligations. Public policy concerns are listed, many of which reflect mutually exclusiveperspectives which is to be expected in a democratically constituted body.
Plan Design Alternatives
Three plan design alternatives are suggested for consideration in this section, along with arecommended plan. The recommended plan is a combination of two alternatives which wereset forth to prompt discussion and honor the intent and specific requirements of the RFP. Thesection describes these plans and includes additional material which sets forth stakeholderinterests (employer and employee) in these plans. All plans assume that Montana will useprudent investor standards for managing assets and that the state's 457 plan will be madeavailable to all eligible public employees. The plans were designed with a general assumptionof cost neutrality, including the payment of existing, unfunded liabilities.
The first plan described is a "50/50 Plan" which is a hybrid defined benefit and definedcontribution plan. It would allow self-directed investment for about half of the plancontributions. An alternative within this option allows for the selection of employeecontribution levels. Other key features include loans and a mechanism to allow state healthbenefit plan premiums to be paid through the retirement plan through employee payments anduse of unused leave time.
The second plan is a "floor offset" plan which allows most contributions to be made availablefor self-directed investment. A floor guarantee would be established which, together withallocations for certain other costs, would somewhat reduce the amount available for employeeinvestment. Should investment account balances fall below the floor, the plan wouldguarantee a minimum benefit. Immediate vesting, maximization of investment opportunitiescoupled with a safety net as well as full portability are key plan features.
The third option is a split plan which would allow a one-time choice between a slightlymodified PERS and a new, 100% defined contribution plan. Employees choosing the definedcontribution plan would invest freely within a state-approved structure for investment andenjoy maximum flexibility of contribution levels, investment options, retirement payouts andportability. Purchases of specified benefits (annuities) in retirement from the PERS would beallowed.
Employees choosing the modified PERS would find the basic, defined benefit structure withwhich they are now familiar. Local employers would have access to the State 457 Plan. Planmodifications include an available lump sum retirement option of 25% and reduced pensionaccruals in favor of pre-paid, pre-tax health benefit premiums. Also included is a conversionmechanism for unused leave time for use in paying health premiums.
ASA's recommendation is to continue studying plan development by using the split plandescribed as the third option above but substituting the 50/50 hybrid plan for the 100%defined contribution option. This would mean that existing PERS employees could stay withthe existing PERS, choose the new modified PERS or select participation in the hybrid plan.New employees would choose between the hybrid plan and the modified PERS.
ASSESSMENT OF PERS SYSTEM
CPERS directed that an objective assessment be made of the PERS system and involvedparties, including employees, employers, PERS board members and the Montana Legislature.Pursuant to this direction, we have included material in response to the sub-categoriesidentified in the RFP for Report #1:
• 1.a. (i) In addition to preliminary discussions held via teleconference with PERS members in November, employee focus groups were gathered in several locations during the second week of January. Group members were selected on the basis of age, salary, service, gender, workplace and employer type. These discussions, including written survey responses, sampled PERS member experiences and goals. Results of these focus groups are included in section II of this report.
• 1.a. (ii) Employer focus groups were also conducted during the same week in January as for employee groups. Employers were selected according to type and geographical location. Employer recruiting and retention needs were evaluated as well as the efficacy of the PERS system as an important tool in this regard. The results of these focus groups are included with the material on employee groups.
• 1.a. (iii) The goals and responsibilities of the Public Employees Retirement Board and the Montana State Legislature were identified in discussions with the PERS Board and staff as well as the Legislature's interim committee evaluating PERS. CPERS is a bipartisan committee created by the Legislature to examine retirement issues and, pursuant to HB 90, prepare recommendations for consideration by the Legislature. CPERS committee members, in a focus group format as well as in general public meetings, distilled sentiments expressed by Legislative colleagues about the existing PERS structure as well as merits and demerits of possible changes.
The goals and responsibilities of the PERS Board are sketched in written material gatheredduring the evaluation process. Two documents, one entitled "Montana Public EmployeesRetirement Board Strategic Planning_System Design" and the other referred to as PERSBoard Policy G9-92 clarify the Board's understanding of its role and aims. Retyped versionsof the documents follow: Montana Public Employees Retirement Board
Strategic Planning - System Design
Purpose of Public Employees' Retirement System:
To provide a secure and predictable component and foundation level of income for retired members.
Public Employees' Retirement Board Plan Design Objectives:
Verbatim from the Montana Constitution:
Public retirement systems shall be funded on an actuarially sound basis. Public retirement system assets, including income and actuarially require contributions, shall not be encumbered, diverted, reduced, or terminated and shall be held in trust toprovide benefits to participants and their beneficiaries and to defray administrativeexpenses. The governing boards of public retirement systems shall administer the system, including actuarial determinations, as fiduciaries of system participants and their beneficiaries.
Public Employees' Retirement Board Prioritized Design Considerations:
Underlying Assumption: the actuarial soundness of the system
Most important (positive) to least important (negative): 1. Sufficiency of benefit 2. Plan stability - actuarial soundness 3. Benefit security - members should not have risk and responsibility (even at loss of flexibility and choice) 4. Legal liability for administration - responsibility for education (both the plan's exposure and the members' need) 5. Employee mobility (a good plan will provide for this reality) 6. Employee retention; short-v. long-term employees (neutral; these are personnel issues) 7. Asset portability (negative to the extent non-retirement or profligate use is allowable) POLICY G9-92 Public Employees' Retirement Board
General Principles Governing the Evaluation of Legislative Proposals by the Public Employees' Retirement Board.
These general principles are established by the Public Employees' Retirement Board toprovide a framework for the consistent evaluation of legislative proposals. The Board'sposition on proposed changes to benefits or systems will be determined on a case-by-casebasis using these principles as guides.
I. Proposals for increases or changes to retirement benefits must include an actuarially sufficient funding mechanism. Proposals must provide funding from sources sufficient to cover future costs and to amortize any unfunded liabilities created by the proposal overa period of time appropriate to the retirement system, but no more than 30 years.
II. Pension funding should be a contemporary obligation. Whenever possible, funding should be the responsibility of the public employers, taxpayers and employees at the time servicesare provided. The Board will promote advanced funding of all benefits to ensure costsare not shifted to future taxpayers or contributors.
III. Pension benefits should be equitably allocated among a retirement system's beneficiaries. Proposals should not discriminate against certain groups of member or retirees in favor of others or expend system assets disproportionately.
IV. A primary goal of a retirement system must be to provide financial security in retirement. "Financial security in retirement" refers to basic financial protection for those who are beyond their normal working years and whose ability to be gainfully employedand earn other income is limited or non-existent.
V. Public retirement plans should provide portability of benefits for workers who change jobs within the state and its political subdivisions. Such portability provisions must assure actuarial costs will be paid for when transferring service between the systems.
VI. The level of benefits and eligibility for benefits should be equitable across the state's public employee retirement systems. Differences in benefit levels and eligibility criteria should be based on objective differences in the nature of the covered occupations ordifferences in coordination with other benefits such as social security.
VII. Proposals should promote consistent administration of public retirement systems. The Board promotes consistent administrative provisions between the public retirementsystems.
POLICY G9-92 Public Employees' Retirement Board
VIII. The Board supports steps to improve the Board's ability to evaluate and review disabilities and the eligibility for disability benefits.
IX. The Board supports steps to promote informed legislative involvement and decision- making in the formulation of public pension policy in Montana.
The CPERS committee and its staff identified the Legislature's role as a law-making bodywhich, together with the Governor, is principally responsible for retirement plan design issues.Nonetheless, Montana Constitutional provisions governing actuarial requirements as well asemployee contract issues constrain Legislative activity with respect to the retirement systems.However, the Legislature's responsibility for law making, plan design and state budgetdetermination gives it a key role as plan sponsor.
The Legislature passed HB 90 in order to assess carefully whether the PERS is fulfilling basicplan sponsor needs in recruiting and retaining employees proficient in handling state and localresponsibilities and whether it does so in the most economically efficient manner. TheLegislative history of HB 90 makes clear that considerable public debate has occurredconcerning the merits of defined contribution plans and defined benefit plans. Issues involvingportability of contributions, flexibility in selecting contribution levels, payout schedules andinvestment vehicles as well as the desire for specified benefits in retirement were specific areasof interest to the Legislature reflected in the bill.
In addition to these matters, the CPERS committee listed a broad range of public policy aimswhich are a concern to them or their colleagues. As may be expected, some of these aims mayappear to be mutually exclusive as they represent substantially different perspectives. Someof the key issues are highlighted below:
• a need for a safety net • a need to provide adequate retirement benefits • a need to protect against erosion of retirement benefits • characterization of PERS as a variation of a welfare system • concern over perpetual liabilities • a need to encourage retirement planning • a need for better investment information • opportunities to enhance retirement benefits • the importance of retaining good employees • the utility of removing unproductive employees • allowing for privatization of public services • minimizing employee risk • transferring investment risk to employees • a need for flexible investments • a need for flexible payout options • a need for flexible contribution levels • a desire for forced savings • an objection to forced savings and need for opt-out provisions • existing retirement fund solvency • a need for health care in retirement • movement of employees toward multi-career lives • enhancing rates of return on investment • removing financial incentives from employers for employee non-participation • protection for low-income employees with regard to system participation • a desire for private and public sector to face retirement issues similarly • protecting Montana workforce against out-of-state competition • encouraging turnover of employee base • protecting institutional memory • minimizing adverse effects of PERS on other personnel policies • minimizing complexity of retirement offerings • protecting employer investment in training by encouraging longevity • encouraging proper use of leave time • providing greater uniformity among public retirement systems
It is clear that any changes made to the PERS to address these issues would be made throughthe normal law-making process. The goal of the CPERS committee is to present to theLegislature coherent, straightforward recommendations which address the specific issuesidentified in HB 90 as well as other appropriate points. These recommendations would bebased upon the assumption that the basic goals of any retirement system would be met, i.e.,that the retirement system could be effective as an important tool for Montana publicemployers to recruit and retain proficient public employees in the most economically efficientmanner. Because of Constitutional protections for existing employees and marketplacecompetition for competent personnel, it is clear that the merit of recommended changes willbe judged primarily by employee choice.
• 1.a. (iv) The focus groups, including one conducted with CPERS, included commentary with respect to the adequacy of the current system design. Results of these evaluationsis included in the section of this report dealing with the focus groups. The PERS Board,in its meeting with CPERS Chair, staff and consultants, expressed interest in reviewingmaterial concerning ways to strengthen the PERS but indicated it is not in a position tocomment about the extent to which the system fulfills the needs and interests of theparties involved.
PLAN DESIGN ALTERNATIVES
The following programs are anticipated to be cost neutral. We recommend that investment powers for the defined benefit plan be subject to theprudent man fiduciary standard. All plans except the floor offset plan are structured to retain defined benefit plan portions within the current PERSplan. When unfunded liabilities under the existing plan are paid off, contributions may be reduced or benefits increased by future legislatures.
Plan Structure
50/50 Plan Employer and employee eachcontribute same amount. 50% ofavailable contributions is put intoDC plan; rest in DB structure
Floor Offset Available contributions go into DC structure. Employerguarantees at least 1% accrual.
Retirement Option Plan Employees choose between 100% defined contribution plan or plan that maintains existing structure with relatively minor changes
Structural issues
Defined Contribution Option
Minor Changes to existingStructure
Financing NewBenefits
Half of available contributions (afterfinancing unfunded liabilities anddeath and disability benefits)available for defined contributioninvestment
Financed by availablecontributions reduced bysurcharge. Future costsdependent on results of definedcontribution plan investments.
Assumes same cost as existing plan.Employees may invest available fundsnet of unfunded liability surchargeand cost of death and disabilitybenefit plans
Assumes same cost asexisting plan. To extentadditional retiree medicalbenefits are provided, newaccruals would be reduced.
Financing UnfundedBenefit Liabilities
Unfunded liability contributionreestablished on basis of changes
Surcharge to fund liabilities ofold plan.
Surcharge on defined contributionparticipants.
No change
DB/DC integration
Future accruals are split betweendefined benefit and definedcontribution plans. Ultimate benefitis the new defined benefit plus anyvalue from the defined contributionaccount
Floor of protection with an offsetfor the value of the definedcontribution account
No integration.
No integration.
Portability mechanics
All defined contribution balances areportable and 4% per year of definedbenefit plan contributions are alsoportable.
All deferred contributionbalances are portable
All defined contribution balances areportable
Only employee contributionsare portable
Investment control
Defined contribution balances only
Defined contribution balancesonly
Defined contribution balances only
On elective DeferredCompensation only
Contribution selection
Option A - Employee selectcontribution rate from 0 to the fullavailable amount in 1% increments,or Option B - No selectability in baselevel of contribution, expand accessto deferred compensation plans forexcess contributions
Additional employeecontributions allowed to deferredcompensation plan (no effect onfloor)
Option A - Employee could selectcontribution rate from 0 to the fullavailable amount in 1% increments,or Option B - No selectability in baselevel of contribution, expand accessto deferred compensation plans forexcess contributions
Expand access to deferredcompensation plans for excesscontributions.
Forms of payment atretirement
Defined benefit plan: Lump sum orannuity. Defined Contribution Plan: LumpSum only under Option A; LumpSum or annuity purchased frompension plan under Option B.
Lump sum or annuity purchasedfrom defined benefit plan.
Option A: lump sum Option B: lump sum or ability totransfer back to defined benefit planat retirement and purchase annuity
annuity or partial (25%) lumpsum
Service purchase
Double existing number of years thatmay be purchased (to allowcomparable amount of benefit purchase as under current plan afterdefined benefit portion of planhalved)*
Treated as additional employeecontribution to deferredcompensation plan (no effect onfloor)s
Treated as additional employeecontribution to deferred compensationplan
Current plan rules
Taxability
Option A: 414(h) applies to definedbenefit piece; 457 to the selectableamount of contribution, This usesup some of current ability to makepre-tax contributions under 457 Option B: 414(h) applies to allmandatory contributions, 457 pre-tax contribution "room"unchanged**
414(h) applies to all mandatorycontributions, allowing 457 pre-tax contribution ability for excesscontributions.
Option A: 414(h) applies to definedbenefit piece; 457 to the selectableamount of contribution, This uses upsome of current ability to make pre-tax contributions under 457 Option B: 414(h) applies to allmandatory contributions, 457 pre-taxcontribution "room" unchanged
414(h) applies to allmandatory contributions,allowing 457 pre-taxcontribution ability for excesscontributions.
Features
Retiree health planbenefits
Employee can make one-timeelection to participate in plan on apre-tax basis. Election would reducefuture pay, require payment ofterminal sick leave allowance intomedical plan VEBA.
N/A
N/A
2% per year credit towardSHBP premium, fundedthrough a VEBA (Futurebenefit accruals would bereduced to pay for cost ofplan)
Retirement eligibility
25 years for new accruals - option to buy 25 year rule onexisting accruals
25 years
N/A
Current plan rules
GABA
GABA on DB portion or purchasedannuities
No GABA
DB plan: existing GABA; DC plan:no GABA
GABA on DB portion
Vesting
5 years for defined benefit plan;immediate for defined contributionplan
Immediate for definedcontribution plan
Immediate
Current plan rules
Terminal leave
Unused days 4/1 contributed pre-taxtowards SHBP coverage if electedretiree medical plan coverage
N/A
N/A
Unused days 4/1 contributedpre-tax towards SHBPcoverage if elected retiree
Part-time employees
$5000 annual pay, no retroactivecoverage decisions
Current plan rules, no retroactivecoverage decisions
$5000 annual pay, no retroactivecoverage decisions
lesser of $50,000 or 50% of definedcontribution plan balance
lesser of 50% of excess of definedcontribution plan balance overvalue of accrued benefit or$50,000
lesser of $50,000 or 50% of balance
N/A
Disability
accrued benefit
floor plan accrued benefit
Separate plan to provide 25% of FAP
Current plan
Death benefit
Account balance in definedcontribution plan plus value ofaccrued benefit in defined benefitplan, minimum value of one monthof pay for each of the first 5 years ofservice
Floor benefit of one month of payfor each of the first 5 years ofservice
**Under Internal Revenue Code Section 414(h) contributions are only pre-tax to the extent that the employee has not option to receive the contributedamounts directly instead of having them paid by an employer to the pension plan. In private letter rulings, IRS has approved 414(h) treatment forcertain service purchase agreements, where the employee irrevocably committed to salary reduction in order to finance the service purchase. It mightbe possible to further explore whether election at intermediate period of time (e.g., each decade) would be eligible for favorable treatment under414(h). STAKEHOLDER ISSUES This section sketches the ways in which various plan structures may address employer and employee interests as identified by HB 90 and focus groupdiscussions. Supplemental observations regarding pros and cons of suggested alternatives may be made in public discussions.
I. EMPLOYER ISSUES
Plan Structure
50/50 Plan Employer and employee eachcontribute same amount. 50% ofavailable contributions is put intoDC plan; rest in DB structure
Floor Offset Available contributions go into DC structure. Employer guarantees atleast 1% accrual.
Retirement Option Plan Employees choose between 100% defined contribution plan or plan that maintains existing structure with relatively minor changes
Structural issues
Defined Contribution Option
Minor Changes to existingStructure
Financing NewBenefits
Pro: Limitations on future unfunded liabilities No required cost increase Transfer of risk Future benefit increases have no retroactive effect on DC value Con: Funding strategies limited for DC portion Additional administration required for DC plan
Pro: Considerable reduction in future unfunded liabilities Transfer of some risk Future benefits without retroactive effect on DC value Con: Funding strategies limited for DC portion Additional risk for asset allocation and investment byparticipants Additional administration required for DC plan
Pro: Limitations on future unfunded liabilities No required cost increase Transfer of risk Future benefit increases have no retroactive effect Con: Funding strategies limited for DC portion Additional administration required for DC plan
Pro: Assumes same cost as existing plan Easily communicated to employees Health benefit obligation addressed Con: Retirement accruals reduced for healthbenefits Additional funding mechanism required(VEBA)
Financing UnfundedBenefit Liabilities
Pro: Existing unfunded liabilities addressed Preserves funding flexibility Con: Does not eliminate ability to take on unfunded liabilities
Pro: Existing unfunded liabilities addressed Preserves funding flexibility Con: Does not eliminate ability to take on unfunded liabilities
Pro: Existing unfunded liabilities addressed Eliminates likelihood of future unfunded liabilities / risks forparticipants under this plan
Pro: Existing unfunded liabilities addressed Preserves funding flexibility Con: Does not eliminate ability to take onunfunded liabilities
DB/DC integration
Pro: Potential to increase efficiency through statewide plan Balance of security and flexibility Con: Compromise on security/flexibility interests Potential political / fiduciary risk for DC investment failures
Pro: Balance of security and flexibility Con: Compromise on security/flexibility interests Potential political / fiduciary risk for DC investmentfailures Assume risk for participant asset managementunderperformance
Pro: Potential to increase efficiency through statewide plan Balance of security and flexibility No additional investment risk is assumed by the employer in this option Allows widest range of selection of risk Con: Security compromised for flexibility Maximizes risk of inadequate retirement benefits No gradation in risk selection
Portability mechanics
Pro: Portability easily available for ¾ contributions Recruiting tool Mechanism for cash transfers involving non-state plans DC portion facilitates privatization goals Con: Risk of loss of seasoned employees Additional cost of portability
Pro: Portability on 100% of DC Recruiting tool Mechanism for cash transfers involving non-state plans DC portion facilitates privatization goals Con: Risk of loss of seasoned employees Additional cost
Pro: Maximum portability with pros of Offset Plan Con: Same as 50/50 Plan
Pro: Promotes retention of employees Reduces plan costs Con: Can hinder recruitment May pose hardship to departing employees
Investment control
Pro: Transfer of risk for DC portion Control maintained for state contributions Con: Higher administrative costs for DC portion Greater scrutiny of state choice of plan providers andadministrative oversight Responsibility for authorizing investment options
Pro: Potential substantial transfer of risk Less responsibility for investment performance Con: Higher administrative costs for DC program Rewards poor performance because larger floor payoutswill go to those with smallerDC balances Encourages risk taking by employees whose balances areless than floor Responsibility for authorizing investment options
Pro: Complete transfer of risk and responsibility for investmentperformance Con: No safety net for low DC balances Responsibility for authorizing investment options
Pro: State protects its DB promise by maintainingcontrol of funds Con: State maintains risk for liabilities Separate apparatus required for self-directedinvestment
Contribution selection
Pro: Encourages planning by employees Both options, especially A, allows differing investmentlevels to recruit and retainemployees with differingretirement plan needs. Con: Inadequate retirement benefits may prompt longer service thandesirable Flexibility increases administrative burden and needfor communication resources
Pro: Availability of Deferred Comp. (457) plan allows differentlevels of retirement savingsand encourages planning Con: No flexibility in contribution levels except in 457 plan
Pro: Encourages planning by employees Both options, especially A, allows differing investmentlevels to recruit and retainemployees with differingretirement plan needs. Con: Inadequate retirement benefits may prompt longer service thandesirable Flexibility increases administrative burden and needfor communication resources
Pro: Expansion of 457 Plan to locals will promoteuniformity Retirement planning is encouraged Con: Only some employees will benefit from 457Plan Possible recruiting problems with an optionthat has forces a choicebetween either nosecurity or no flexibilityin options
Forms of payment atretirement
Pro: Allows employees to determine best use of asset pool (includingstarting a business) Con: Lump sum distributions can drain assets from investment inDB plan Lump sum distributions increase employer risk of publicassistance for retirees Annuitizing DC balances returns risk to employer underOption B
Pro: Allows employees to determine best use of asset pool(including starting a business) Con: Lump sum distributions can drain assets from investment inDB plan Lump sum distributions increase employer risk ofpublic assistance for retirees Annuitizing DC balances returns risk to employer
Pro: Allows employees to determine best use of asset pool (includingstarting a business) Con: Lump sum distributions increase employer risk of publicassistance for retirees Annuitizing DC balances returns risk to employer underOption B
Pro: Annuity requirement promotes careful use offunds Partial lump sum allows optimization ofemployee choice Con: Lump sum distributions increase employer riskof public assistance forretirees
Service purchase
Pro: Allows flexible transfer from DB and DC plans without lossof service credit Con: Question of service equity regarding transfers from non-state plans Cost of service credit may be prohibitive
Pro: Allows cash credits from other plans Con: Question of service equity regarding transfers from non-state plans
Pro: Under Option B, allows cash credits from other plans Con: Question of service equity regarding transfers from non-state plans
Pro: Availability of service credit purchase Con: Cost of service credit may be prohibitive
Taxability
Pro: 414h eligibility preserved for all mandatory contributions; 457plan access increased for localemployees Con: Option A reduces tax deferred contribution possibilities foremployees Increased administration due to offer of state 457 plan to alllocals
Pro: 414h eligibility preserved for all mandatory contributions;457 plan access increased for local employees Con: Increased administration due to offer of state 457 plan to alllocals
Pro: 414h eligibility preserved for all mandatory contributions; 457plan access increased for localemployees Con: Option A reduces tax deferred contribution possibilities foremployees Increased administration due to offer of state 457 plan to alllocals
Pro: 414(h) applies to all mandatorycontributions, allowing457 pre-tax contributionability for excesscontributions.
Features
Retiree health planbenefits
Pro: Historical replacement ratio (which included post-retirementhealth) restored in part Strengthen SHBP Recruiting tool Con: Creation of new post- retirement liability Requires careful accounting structure for employee time atstate and local level Tax complications associated with individual requests foropting out of designated plan
N/A
N/A
Pro: Health benefit obligation addressed in part Strengthen SHBP Recruiting tool Con: Pension accruals reduced to pay for healthbenefits Creation of new liabilities / Fundingmechanisms
Retirement eligibility
Pro: Parity with TRS Promotes turnover Con: Additional costs Indiscriminate promotion of early retirement (premature lossof valuable employees)
Pro: Parity with TRS on floor benefit Promotes turnover Con: Additional costs Indiscriminate promotion of early retirement (prematureloss of valuable employees)
Pro: Less costly than lower retirement age No conversion calculations required for transfers Con: Incompatible with TRS
Pros and cons same as DCoption
GABA
Pro: Secures replacement ratios over time Flexibility on DC portion for purchase of GABA Con: DC losses may thwart purposes of GABA
No GABA
Pro: No increase in unfunded liability Con: Erosion of replacement ratio If Option B, possibility of unticipated liabiilties
Pro: Maintain replacement ratio Recruiting tool Con: Possibility of unanticipated liabilities
Vesting
Pro: vesting requirement on DB portion facilitates recovery oftraining investment Lack of vesting requirement for DC portion a recruiting tool Con: Immediate vesting in DC portion facilitates prematuredepartures
Pro: vesting requirement on DB portion facilitates recovery oftraining investment Lack of vesting requirement for DC portion a recruiting tool Con: Immediate vesting in DC portion facilitates prematuredepartures
Pro: Immediate vesting offers a recruiting tool Con: Possible loss of employees prior to recovering traininginvestment
Pro: vesting requirement on DB portion facilitatesrecovery of traininginvestment Choice of plan option with vesting facilitatesrecruitment Con:
Terminal leave
Pro: Promotes linkage of active employment and retirementgoals Encourages prudent use of leave time Con: May discourage proper use ofleave time (i.e. using time torestore health and productivity)
N/A
N/A
Same pros and cons of 50/50Plan except pension accrualsare reduced to pay for benefitinstead of pay.
Part-time employees
Pro: Eliminates administrative burden of many part-timeemployees Reduces retirement costs Con: Possible hindrance to recruitment Limits ability to correct mistakes retroactively for DCbenefit
Pro: Eliminates administrative burden of many part-timeemployees Reduces retirement costs Con: Possible hindrance to recruitment Limits ability to correct mistakes retroactively for DCbenefit
Pro: Eliminates administrative burden of many part-timeemployees Reduces retirement costs Con: Possible hindrance to recruitment Limits ability to correct mistakes retroactively for DCbenefit
Pro: Eliminates administrative burden ofmany part-timeemployees Reduces retirement costs Con: Possible hindrance to recruitment Limits ability to correct mistakes retroactivelyfor DC benefit
Loans
Pro: Recruiting tool Con: Administrative burden Employees may drain a portion of assets before retirement
Pro: Recruiting tool Con: Administrative burden Employees may drain a portion of assets before retirement
Pro: Recruiting tool Con: Administrative burden Employees may drain a portion of assets before retirement
N/A
Disability
Pro: Secures protection of valued employees Offsets financial cost to public assistance Con: Continuing liability on DB portion Option A may reduce disability resources depending on DCparticipation and performance
Pro: Same as 50/50 plan Con: Continuing liability on floor accrued benefits
Pro: Same as 50/50 Plan Con: Additional costs Option A may reduce disability resources depending on DCparticipation and performance
Same pros and cons as DBportion of 50/50 Plan
Death benefit
Pro and Con same as disabilitybenefit
Same as 50/50 plan
Pro: Provides for some death expenses Con: Minimal account balances,especially for newer employeesmay be inadequate for deathexpenses
Same pros and cons asdisability portion above
II. EMPLOYEE ISSUES
Plan Structure
50/50 Plan Employer and employee eachcontribute same amount. 50% ofavailable contributions is put intoDC plan; rest in DB structure
Floor Offset Available contributions go into DC structure. Employerguarantees at least 1% accrual.
Retirement Option Plan Employees choose between 100% defined contribution plan or plan that maintains existing structure with relatively minor changes
Structural issues
Defined Contribution Option
Minor Changes to existingStructure
Financing NewBenefits
Pro: No required cost increase DC portion increases opportunity to increaseretirement payout Con: Transfer of risk on DC portion increases possibility of areduced retirement payout Future benefits without retroactive effect on DC value Additional administration costs required for DC plan reducebenefit dollar effectiveness
Pro: No required cost increase DC portion increases opportunity to increaseretirement payout Floor transfer of risk, some participants will have mainlyupside Con: Some risk on DC portion for reduced retirement payout Future benefits without retroactive effect on DCvalue Additional administration costs required for DC planreduce benefit dollareffectiveness
Pro: No required cost increase DC portion maximizes opportunity to increaseretirement payout Con: Transfer of risk on DC portion maximizes possibility of areduced retirement payout Future benefits without retroactive effect on DC value Additional administration costs required for DC plan reducebenefit dollar effectiveness
Pro: Familiar benefit structure Health benefit obligation addressed Benefit security maintained Con: retirement accruals reduced for healthbenefits Minimal benefit flexibility Potential financial gains sacrificed for security
Financing UnfundedBenefit Liabilities
Pro: Existing unfunded liabilities addressed Con: New hires explicitly see cost of funding past service liabilities
Pro: Existing unfunded liabilities addressed Con: New hires explicitly see cost of funding past serviceliabilities
Pro: Existing unfunded liabilities addressed Con: New hires explicitly see cost of funding past service liabilities
Pro: Existing unfunded liabilities addressed Con: New hires explicitly see cost of funding pastservice liabilities
DB/DC integration
Pro: Efficiency of single statewideDC plan Balance of security and flexibility (protection offered byDB guarantee and opportunityof DC self-directed investments) Con: Compromise on security/flexibility interests Liability for DC investment failures
Pro: Efficiency of single statewideDC plan Balance of security and flexibility (protection offeredby DB guarantee andopportunity of DC self-directed investments) Con: Compromise on security/flexibility interests Liability for DC investment failures Safety net of floor plan exposes all participants tocosts based on investmentunderperformance of anindividual member
Pro: Initial ability to choose betweenrisks and rewards Efficiency of statewide DC plan Maximizes retirement payout possibilities Con: Security trade-off for flexibility Maximizes risk of inadequate retirement benefits
Pro: Initial ability to choosebetween risks andrewards Efficiency of statewide DC plan Con: Flexibility trade-off for security
Portability mechanics
Pro: Portability easily available for ¾ contributions Recruiting tool Mechanism for cash transfers involving non-state plans Con: DC portion facilitates privatization goals but mayprotect employees' investment Additional cost of portability
Pro: Same as 50/50 plan except 100% of DC balances wouldbe available for portability Con: Same as 50/50 plan except portability cost would beslightly higher
Pro: Maximum portability with pros of 50/50 Plan Con: Same as 50/50 Plan
Pro: Promotes retention of employees Reduces plan costs Con: Can hinder recruitment May pose hardship to departing employees
Investment control
Pro: Increased flexibility to achieve personal goals (up to 50% self-directed investment) Satisfaction of control Con: Higher administrative costs for DC portion Assumed risk for DC portion Anxiety of control and decision- making requirements
Same pros and cons as 50/50plan except investment controlincludes larger share of contributions
Pro: Complete assumption of risk and responsibility for investmentperformance for those who wantit Con: No safety net for low DC balances Burden of directing personal investment program which (inmost cases) is largest part ofexpected retirement income
Pro: No burden of investment decision-making No direct investment risk because of state benefitguarantee Con: No control over PERS contributions orinvestment possibilities Separate apparatus and increased contributionlevel (457 plan) requiredfor self-directedinvestment
Contribution selection
Pro: Encourages planning by employees Both options, especially A, allows differing investmentlevels to recruit and retainemployees with differingretirement plan needs. Con: Inadequate retirement benefits may prompt longer service thandesirable Flexibility increases administrative burden and needfor communication resources
Pro: Availability of Deferred Comp. (457) plan allowsdifferent levels of retirementsavings above PERS baseand encourages planning For those wishing to minimize attention toretirement plans, basic plandoesn't require decisionsabout how much should beallocated to self-directedinvestment Con: For those wishing flexibility in contribution levels, only457 plan participation makesthis available
Same pros and cons as 50/50 PlanDC portion
Pro: Expansion of 457 Plan to all locals could promoteuniformity Retirement planning is encouraged Con: Only some employees will benefit from 457Plan
Forms of payment atretirement
Pro: Lump sum distribution increases flexibility to achieve retirementgoals Annuitizing balances at retirement under Option Breturns risk to employer Con: Lump sum distributions increase employee risk of requiringpublic assistance for retirees Additional retirement planning resources are required
Same as 50/50 plan Option B
Same pros and cons as 50/50 plan
Pro: Partial lump sum distribution increasesflexibility to achieveretirement goals Annuity requirement promotes careful use ofretirement resources Con: Partial lump sum distributions mayincrease employee risk ofrequiring publicassistance for retirees
Service purchase
Pro: Allows flexible transfer from DB and DC plans without lossof service credit Con: Question of service equity regarding transfers from non-state plans (how should servicebe counted toward 25 yearrequirement?)
Pro: Allows cash credits from other DC plans Con: Same as 50/50 plan
Same pros and cons as Offset Plan
Pro: Availability of service credit purchase Con: Cost of service credit may be prohibitive
Taxability
Pro: 414h eligibility preserved for all mandatory contributions; 457plan participation increased forstate and local employees Con: Option A reduces tax deferred possibilities Increased administration due to offer of state 457 plan to alllocals
Same as 50/50 plan Option B
Pros and Cons same as 50/50 Plan
414(h) applies to allmandatory contributions,allowing 457 pre-taxcontribution ability for excesscontributions.
Features
Retiree health planbenefits
Pro: Historical replacement ratio (which included post-retirementhealth) restored in part Strengthen SHBP Recruiting tool Con: Creation of new post- retirement liability which maypreclude other benefitenhancements Requires careful accounting structure for employee time atstate and local level Tax complications associated with individual requests foropting out of designated plan
N/A
N/A
Pro: Health benefit obligation addressed in part Strengthen SHBP Recruiting tool Con: Pension accruals reduced to pay for health benefits Creation of new liabilities may preclude offer ofother benefits
Retirement eligibility
Pro: Parity with TRS Additional flexibility for retirement planning Con: Additional costs would reduce money available for DCinvestment Cost for employee transfers may be prohibitive to some
Same as 50/50 plan excepttransfers from existing planwould be without additional cost
Existing Plan rules Pro: Uniformity among PERS employees Less costly benefit than lower retirement age Con: Incompatible with TRS Longer service required in PERS
Pros and cons same as DCoption
GABA
Pro: Secures replacement ratios over time Flexibility on DC portion for purchase of GABA underOption B Con: DC losses may thwart purposes of GABA
No GABA Pro: Account balance at retirement may yield payoutsuperior to actuarial value ofexisting plan, includingGABA Con: Account balance at retirement may besubstantially less thanactuarial value of existingplan, including GABA.
Pro: GABA needs may be satisfied with superior investmentperformance Con: GABA needs may exacerbated because of investmentperformance
Pro: Maintain value of pension Recruiting tool Con: Cost of GABA may preclude funding of otherbenefits
Vesting
Pro: Lack of vesting requirement for DC portion a recruiting tool Con: Cost associated with immediate vesting in DC component
Pro: Promotes linkage of active employment and retirementgoals Encourages prudent use of leave time Con: May discourage proper use of leave time (i.e. using time torestore health and productivity)
N/A
N/A
Same pros and cons of 50/50Plan
Part-time employees
Pro: Eliminates administrative and financial burden for many part-time employees Con: Possible hindrance to recruitment Limits ability to correct mistakes retroactively for DCbenefit
Same as 50/50 plan
Pros and cons same as 50/50 Plan
Pros and cons same as 50/50plan
Loans
Pro: Recruiting tool and additional flexibility for employee finances Con: Short pay-back periods noticeably reduce pay May reduce long-term retirement accumulation
Same as 50/50 plan
Same pros and cons as 50/50 Plan
N/A
Disability
Pro: DB portion guarantees some resources Con: Cost of disability reduces funds available for DC investment Option A may reduce disability resources depending on DCparticipation and performance
Pro: Possibility of superior benefits depending upon DCaccount performance Floor plan accrued benefit guarantees some resources Con: Inadequate disability benefits depending on DC accountperformance
Pro: Separately purchased plan guarantees some resources Con: Additional costs reduce amounts available for DC investment
Same pros and cons as DBportion of 50/50 Plan
Death benefit
Pro and Con same as disabilitybenefit
Same as 50/50 plan
Pro: DC account provides for somedeath expenses Con: Minimal account balances, especially for newer employeesmay be inadequate for deathexpenses
Same pros and cons asdisability portion above
RECOMMENDATION
In order to facilitate decision-making, ASA has submitted the options noted above for review.These options are consistent with the constraints of HB 90 and the RFP issued by CPERS.The options are submitted to promote discussion regarding public policy choices and weexpect that work done for Report #2 and Report #3 will be on plan designs which do notexactly match exactly those above.
Consequently, we recommend to CPERS that it pursue work on a plan which combines thestrength of the 50/50 Plan and the Retirement Option Plan. Because of the Legislative historyof HB 90 and our discussions with CPERS we thought it best to present an option whichallowed for a 100% defined contribution plan (DC plan) selection by employees. This optionis offered for discussion purposes (and committee direction) as one split of the RetirementOption Plan but our assessment of Montana's overall needs leads us to conclude that fewemployees would choose a 100% defined contribution plan.
It is clear from HB 90 that the Legislature wishes recommendations for a plan whichconsiderably enhances employee choice. Focus Group feedback supports considerable interestin plan flexibility and self-directed investment but does so within a context of substantialcaution. Most employers and employees voiced reservations about a plan which would notguarantee some kind of retirement income to employees.
The wording of HB 90 notes that a "specified benefit" component needs to be included in newplan recommendations and it is our understanding from discussions with involved parties thatthis means "defined benefit" (DB plan). If a 100% defined contribution plan is the alternativeto a 100% defined benefit plan in the Retirement Option Plan, it would satisfy some portionof the existing (and future) PERS community but by no means all. It is our judgment that achoice between a hybrid plan and a 100% defined benefit plan would address the needs ofconsiderably more Montana employees and employers than a choice between 100% DB and100% DC. Although there is currently considerable interest in defined contribution plansbecause of market performance in recent years, there exists widespread uncertainty on thepart of most Montana public employers and employees we heard from with respect to thewisdom of moving 100% of retirement assets into a self-directed investment setting, even ifthe employer is selected as the investment manager.
It is also clear that a large segment of Montana employers and employees do not wishemployees to assume any responsibility for investment decisions because of the risk involvedas well as the practical, educational requirements for handling investment practices. Yet, thereare identified needs which are not being met within the existing PERS structure having to dowith supplemental investment opportunities for all employees, post-retirement health care andthe use of unused leave time. These needs could be met with limited changes to the existingsystem.
Should a choice be offered between a hybrid plan and a modified PERS, we believe most ofthe needs identified during the review process would be met for both employers andemployees along with the requirements of HB 90. Specifically, needs could be listed asfollows:
Hybrid Plan DC portion
Hybrid Plan DB portion
Modified PERS
• Choice of contributions
• Guaranteed benefit
• Guaranteed benefit
• Choice of payouts in retirement
• Disability and death benefits
• Health benefit and disability and deathbenefits
• Self-directed investment
• Incentive for longevity
• Unused leave conversion
• Post-retirement health care
• 457 plan for all PERS
• Supplemental savings (457 plan)
• Familiarity of plan structure for existingemployees
• Increased portability of contributions
• Incentive for longevity
As noted earlier in this report, it is clear that any changes made to the PERS to address theseissues would be made through the normal law-making process. The goal of the CPERScommittee is to present to the Legislature coherent, straightforward recommendations whichaddress the specific issues identified in HB 90 as well as other appropriate points. Theserecommendations would be based upon the assumption that the basic goals of any retirementsystem would be met, i.e., that it could be effective as an important tool for Montana publicemployers to recruit and retain proficient public employees in the most economically efficientmanner. Because of Constitutional protections for existing employees and marketplacecompetition for competent personnel, it is clear that the merit of recommended changes willbe judged primarily by employee choice. We believe direction by CPERS to explore ourrecommendation will increase the likelihood of such affirmative choices.
