EXECUTIVE SUMMARY In our prior reports prepared for the Committee on Public Employee Retirement Systems(CPERS), ASA outlined three plan design alternatives to the current plan plus a hybridplan and presented the costs and benefits of the Modified Public Employee RetirementSystem (MPERS). This report expands the discussion of the MPERS by discussing:
This section clarifies supporting arguments for the following policy recommendations:
Place responsibility for the 401(a) defined contribution plan within PERS trustee andPERD administrative structures.
Place responsibility for the state's 457 plan within PERS trustee and PERDadministrative structures.
Establish a dedicated retirement education fund supported by annual payroll contributionsof .1% from PERS members and employers.
Attain consensus on the desirability of preparing Constitutional revision language.
Establish the PERS trustee board as a seven member board comprised of four non-PERSgubernatorial appointees, two active and one retired PERS members. One boardmember would be required to have specific investment expertise.
Establish an election procedure for PERS trustees.
Place a PERS trustee on the Board of Investments.
Administration Issues
The first section of the report discusses the current configuration for administering thedefined benefit and the IRC Section 457 plans. The administrative implications of theproposed MPERS are discussed as are “best practices” in the administration of definedcontribution plans.
Issues and timelines for a two-phase implementation plan are given. It is estimated thatthe provider search will take eight to twelve months and that implementation/conversionwill take an additional eight to fifteen months. We have also estimated the costs ofimplementation and examined the factors which affect ongoing member service costs. These costs include approximately $150,000 for recordkeeper search, $200,000 for pre-conversion education of those initially eligible to become members of MPERS, andongoing administration costs of $400,000 annually for the initial members increasing by$200,000 annually as mew members join MPERS. These costs do not include the costfor internal, i.e., State of Montana, personnel involved in the administration of theoutsourced plan.
VEBA Issues
This section of the report provides additional information concerning the VoluntaryEmployees' Beneficiary Association (VEBA) and discusses tax qualification and costissues for the underlying health plans.
Benefits Survey Results
The final section of the report examines the results of the survey on benefitcommunications taken as part of the focus groups. The results indicate that employeesbelieve themselves to be somewhat informed about their benefits and that they preferprint or face-to-face communications over electronic communications media. This datashould be integrated into the development of the communications plan discussed in theAdministration Issues section.
GOVERNANCE ISSUES This section will clarify supporting arguments for the following policyrecommendations:
Place responsibility for the 401(a) defined contribution plan within PERS trustee andPERD administrative structures.
Place responsibility for the state's 457 plan within PERS trustee and PERDadministrative structures.
Establish a dedicated retirement education fund supported by annual payroll contributionsof .1% from PERS members and employers.
Attain consensus on the desirability of preparing Constitutional revision language.
Establish the PERS trustee board as a 7 member board comprised of 4 non-PERSgubernatorial appointees, two active and one retired PERS members. One memberwould be required to have investment expertise..
Establish an election procedure for PERS trustees.
Place a PERS trustee on the Board of Investments.
General Assumptions for Montana
This report is submitted with a general intent of minimizing structural and administrativechanges required for new plan implementation. Consequently, recommendations havebeen made with the idea of avoiding the creation of entirely new structures of authorityand administrative entities needed to facilitate the new defined contribution plan. We donot recommend creating a separate board of trustees/administration for the new plan;rather we recommend re-working existing structures. This is done for three reasons:expense, experience and expectation.
First, it is observed that using an existing apparatus to assume new tasks is, by and large,less expensive than erecting new structures. This is true of boards of trustees as well asadministrative agencies. All other things being equal, one is less likely to pay forduplication of work by integrating the new with the old. Moreover, using existingstructures for governance and administration of dual plans promotes coherent financialplanning and precludes inter-agency conflicts that could evolve regarding normal andaccrued liability costs for new hires.
There is a risk, however, which should be noted: saddling those with new tasks who arenot eager to shoulder them can be counter-productive to any new enterprise. Unless thereis a strong commitment to see the success of a new venture, current obligations maycontinue to take up attention to the detriment of new responsibilities. The value of moneysaved by avoiding new administrative or governance structures could be lost if thepurpose of the new enterprise is viewed as inconsistent with the purposes of existingadministrative structures by governing bodies.
The experience of well-seasoned decision-makers and administrators is invaluable for thepromotion and health of any new program. To the extent that experience with Montana'spublic employee retirement needs can be immediately leveraged for the benefit of new,defined contribution plan members as well as 457 plan participants, these plans will bebetter off. The necessary complexities and inevitable problems which surround publicretirement systems are better addressed by those who understand the nuances of systemdemographics, politics, programs and finance. Those who have solved problems beforeare more likely to be able to do it again in the most expeditious manner.
The expectation of retirement system members is a very important aspect of any system'shealth. Benefit security is not merely a function of financial calculation and investmentbut also of member communication. The high stakes of retirement make substantialchanges in retirement plans, even positive changes, unsettling to members (especiallyretirees). To the extent that program enhancements can be made without wholesalechanges in familiar structures, the better. Dividing public employees between twodifferent structures of authority and/or administrative agencies is more likely to inviteperceptions that risk has increased for all employees, not only those who have chosen anew retirement plan. Any action that may undermine confidence in any component of aretirement system should be avoided or at least undertaken with utmost care.
Nonetheless, as may be expected, ASA suggests certain structural modifications in orderto ensure the integrity of new and existing plans as well as the integration of the state's457 plan with retirement plan apparatus. The advent of a defined contribution plan whichwill allow self-directed investment changes the roles and interest level of plan participantsand should prompt pension decision-makers to craft structures which will protect allMontana PERS stakeholders.
Consolidation of Structure and Operations
To accomplish the tasks assigned by HB 90, as reflected in the Modified PublicEmployee Retirement System (MPERS) endorsed by CPERS, ASA wishes to recommendconsolidation of the responsibility for administrative and fiduciary oversight of the new401(a) defined contribution plan and state 457 plan with that of the current PERS plan.Although there are several possible alternatives for plan implementation, we believeanything short of administrative integration of all retirement funds would compromise thepossibilities for optimizing the retirement planning environment contemplated by the bill.
Given the voluntary nature of participation the state's 457 plan can by no means serveas the anchor of the Montana retirement system; but, evaluating the best place to handleits administration unpacks some of the key issues which lead to our conclusion forcomplete integration. One of the requirements of HB 90 stipulated that the work productof this review process include recommendations to enhance opportunities forsupplemental retirement savings. As indicated in earlier reports, ASA believes that thesound track record of the state's 457 plan provides the best foundation upon which tobuild a strong voluntary retirement savings plan within the constraints of current federaltax laws. Most, but not all, local employers have also established either 457 plans or,in the case of the school districts, 403(b) plans. However, persistent comments duringthe focus groups have indicated that employees remain unaware of their options, or insome cases may work for an employer that has not established a voluntary plan. Thus,we have previously recommended that the state 457 plan, including the innovativeinvestment options it has developed, be made available to PERS members at localemployers.
The inception of a 401(a) defined contribution plan offers the opportunity to integratetrustee and administrative mechanisms for both mandatory and voluntary retirementsavings programs. There is a need to offer coherent retirement education andcommunication materials to members. These materials will be most effective if optionsregarding voluntary contributions are included. Enrollment counseling, financialplanning, pre-retirement counseling and regular employee benefit statements are mosteffective to the extent they embrace all financial components of retirement. Consequently,it makes most sense to have the same entity handle both the mandatory and voluntaryretirement savings plans.
An alternate view would maintain a separate state apparatus for administration of thestate 457 plan. This view would explicitly recognize that most local employers havealready established 457 plans, and that local employers may choose to continue theseplans rather than participate in a state-wide program. Basically, this view asks thequestion whether the advantages to be gained by consolidating administration andfiduciary oversight for the largest employer in the system overrides the advantages ofsimplicity and lack of administrative complexity in having administration for the 457 planas a separate stand-alone entity. In particular, it may be difficult to develop educationalmaterials that integrate the voluntary and mandatory retirement programs given that notall the voluntary programs are identical. While there is merit to the reminder of thepotential administrative complexity of the interaction of a state PERS with variousemployer 457 plans, we believe that the state should seize the opportunity to integrateretirement programs to the maximum extent possible. It may be the case that participantsin the state 457 plan (both state employees and any local employees that are permittedto join under an expanded program) reap the advantages of coordinated education to themaximum extent and that, because reinforcing programs at the local 457 plan level arenot integrated, participants in the local 457 plans do not receive as much coordinatedreinforcement of retirement education. But this argument should not be allowed to standin the way of doing the best possible integration of retirement programs where suchintegration is possible.
Likewise, it makes sense to have the same entity be responsible for all of the 401(a)plans. In addition to facilitating well-integrated communications, establishing clean linesof accountability for retirement plan fiduciaries and administrators is critical to theintegrity of plan operations. The recommended retirement plan option maintains a closerelationship between both 401(a) plans. Indeed, it uses the defined benefit plan as thedefault plan for new hires and links funds available for self-investment with the actuarialstability of the defined benefit plan.
Consequently, it appears most appropriate from a conceptual point of view to have thesame administrator and structure of authority for the self-directed investment plans andplace them within the government apparatus responsible for the defined benefit plan. Inshort, if the PERS trustees and the PERS administrators are prepared to embrace thesenew responsibilities, we are confident that such integration is best for 401(a) and 457plan participants.
Trustee Issues
The PERS board of trustees functions as the entity that has primary responsibility forprotecting beneficiary interests. The current board, comprised of six gubernatorialappointees serving staggered five-year terms, supervises key administrative functionsincluding investments and operations as well as legal and actuarial services. The natureof the state's defined benefit plan lends itself to a board that is wholly appointed becauseof the state's default position as guarantor of the benefit design.
The prospect of adding a Sec. 401(a) defined contribution plan as well as responsibilityfor oversight of the state's Deferred Compensation (Sec. 457) plan to the trustee'spurview adds a new dimension of member risk-related activity. PERS trustees will beaccountable to PERS members for the first time in a defined contribution typeenvironment where retirement amounts vary directly with participant investment choices,and where the decisions on the menu of investment choices available is directly andhighly visible to participants.
It is likely that this transfer of risk to individual members will generate requests forgreater participation in PERS trustee and administrative decisions by members or theirrepresentatives. Investment vendor selection and supervision as well as benefit-relatededucation and communication programs are assumed to become subjects for closescrutiny.
One mechanism, which is often employed by state retirement systems to facilitateemployee participation in the decision-making process and achieve a better balance ofresponsibility and authority, is to elect member representatives. These representativesmay be elected by secret ballot conducted in a manner used by many organizations. Thisballoting process can be handled through PERD but will probably be directly managedby one of the many companies available for such private elections.
Should this route be chosen for the PERS, we would recommend the following: a sevenmember trustee board comprised of four gubernatorial appointments [an alternative wouldbe two from the Governor and one each from the two presiding legislative officers], twoactive members, one each from the DB and DC plans and one retired member. One ofthe gubernatorial appointments could be required to have investment expertise. Giventhat the defined contribution plan is limited to PERS members, it is expected that at leastone of the member representatives would be a PERS member. In addition, given thepreponderance of PERS members in the plans covered by the current board, it may belikely that other elected members will be from PERS covered employment. It should berecognized that the addition of elected members to the Board will change the checks andbalances inherent in the current system of gubernatorial appointment. An alternative toelection of members could be an advisory council, similar to the structure used by thestate 457 plan, but employees may argue for more substantive representation.
Trustees could continue current five-year terms but initial office-holders would serveterms allowing for subsequent terms to be staggered. Employee representatives would beelected; others would be appointed. A gubernatorial appointee would serve as the boardchair. One trustee, other than the designated member sent by the Board of Investmentswould be selected annually by the PERS board to sit as a member of the Board ofInvestments. Increased responsibility for oversight of self-directed investments providesa clear reason to strengthen the trustees' exposure to financial resources.
This scenario would offer the following:
Facilitate a working majority (4/7)
Guarantee that even with election procedures in place there remain 2 trustees withinvestment experience
Ensure clear communication between PERS and BOI
Strengthen interface between asset and liability management structures
Provide avenue for democratic selection of employee representatives
Ensure representation for both DC and DB plan members
Encourage retiree participation through democratic process
Satisfy employee representation for self-directed investment vendor selection andcontract monitoring
457 Plan Integration
As noted above, the recommendation is to bring the 457 plan over from the Dept. ofAdministration and seat it within the PERS structure. This would provide oversight bythe PERS trustees and operational function by PERD. Although ASA believes there arestrong reasons for moving all local employees into a state-wide 457 plan, it is clear thatsuch a mandate would be infeasible. Consequently, it appears that the wisdom ofparticipating in the state's 457 plan needs to become evident to local employees andemployers. Although some might argue that 457 plan participation might better beencouraged by local human resource managers, we think it more likely that 457 planparticipation will be facilitated through the state retirement education and communicationprograms funded with the dedicated education account. Some lines of argument forencouraging local participation are as follows:
Ease of transfer among employers
Less expensive administration fees (the state should be able to command the lowest feesand offer plan participants low administrative costs because of economies of scale
Complete integration of retirement account balance information (401(a) and 457) withsingle agency contact
Provide Fixed Income Investment option through State Board of Investments similarto the state 457 plan
Employee trustee representatives
Integrity of state plan administration and disclosure
State strength for vendor supervision and dispute resolution
Access to integrated retirement planning and education (401(a) and 457)
Local employer ease of single agency contribution reporting and funds transfer
Education
Ordinarily, education and communication matters would be issues reserved foradministrative discussions and not involve matters of governance. It is clear, however,that the new emphasis on self-directed investment and retirement planning (401(a) definedcontribution and 457 plans) contemplated for Montana public employees requires a focuson education and communication. Defined benefit plan participants, in addition tovoluntary plan contribution (457) decisions will face VEBA choices that require carefulplanning. Earlier (Report #1) Focus Group data revealed a marked need for increasedcommunication with PERS members, even if plan designs are unchanged. Adding oremphasizing self-directed or VEBA investment plans significantly intensifies the need forproviding information to plan members.
One of the common problems with retirement systems cited in our focus groups byparticipants and employers and confirmed in general research studies is the relativelylow-level of information provided to members. Defined contribution plans, throughinvestment vendors, provide some transactional information, but generally speaking.basic issues of enrollment counseling, retirement planning and pre-retirement counselingare left unaddressed. It is understandable, if not justified, that administrators often mayfind it difficult to address this area, particularly when the problems associated with publicbudgeting are considered. Issues of education and communication are easy to defer inlight of other, more immediate concerns. Nonetheless, plan members cannot reap the fullbenefit of any retirement plan without the proper tools of thorough education and regularcommunication.
To address this problem of adequate retirement education and communication, ASArecommends that a dedicated retirement education fund be established and supported withannual contributions for PERS members equal to .1% of pay. This fund, administeredby the PERS, should be used exclusively for education and communication programs formembers, including education programs for potential participants. (The costs for pre-enrollment education for the initial participants in the plan are not envisioned to comeform this fund. They are discussed separately under Administration Issues.) Thepresence of such a fund should go a long way toward eliminating budget conflicts abouteducation and communication costs.
Some might argue that such dedication would reduce funds available for investment,which is true. However, the basic purpose of retirement funds is to meet memberretirement goals. If these goals are poorly defined or mistakes in judgment are maderegarding achieving these goals because of misinformation, then it is clear that thedecision-making framework is counter-productive to basic purposes.
Education and communication is not a luxury for retirement system members. Thedisclosure of retirement system operations is part of the integrity of the plan andassistance for members in using the plan to achieve long term goals is a necessarycondition of that success. Money spent wisely for education and communication,particularly when self-directed investment opportunities are available in some form, isexpected to increase funds available for retirement purposes, not diminish them.
A dedicated fund will not only ensure availability of resources but also protect theinterests of all retirement system members. Even if the 401(a) defined contribution planproves to be popular, participation will likely be directly attributable to education andcommunication resources made available to PERS members. Both the mandatory andvoluntary savings plans are expected to have participant levels for the foreseeable futurethat will be a minority of PERS membership. It is important to ensure that thesemembers are treated fairly for administrative purposes and this is made more likely byhaving a well-funded and well-integrated retirement education and communicationprogram.
We believe it will be easier to draw local government participants into the state's 457plan if the education fund drives the education and communication programs for PERSparticipants. Material and programs that offer local PERS members a clear view of allretirement resources and options will be attractive. Only state 457 plan participants willget the full value of this integrated approach to retirement planning; local 457 planparticipants will not have this advantage.
Constitutional and Statutory Issues
Since Constitutional matters are of paramount importance for governance, it is wise toaddress these issues at the outset of the legislative process. Although ASA does notobserve any Montana Constitutional language which would appear to preclude theestablishment of a 401(a) defined contribution plan within the existing PERS framework,it would be prudent to seek a consensus on this matter among pension plan decision-makers. As noted earlier, benefit security is not only a matter of financial calculation butalso entails confidence in the integrity of a retirement plan. Consequently, any potentiallegal ambiguities raised by interested parties should be resolved prior to offering planenrollment.
Should Constitutional amendment be sought for purposes of authorizing a new definedcontribution plan for Montana PERS employees, it may be worthwhile to considerrelated Constitutional matters needing clarification and address them at the same time. In particular, does existing language preclude any sort of lending by the retirementsystem including lending arranged solely for the members' benefit (e.g. loans orsecurities lending as investment). If so, language may be considered authorizing loans.
Statutory restrictions on asset allocation for the Board of Investments may also need tobe investigated. Are these restrictions appropriate or inconsistent with the PERS Board'sprudent expert investment standard? If the Legislature is confident with the prudentexpert standard for investment, it may wish to consider removing asset allocationlanguage from the statute.
ADMINISTRATION ISSUES In this section we will discuss the administration implications of the proposed definedcontribution aspect of the MPERS. The following will be discussed:
Current practices Administration Requirements That Differ Because Of Proposed Plan Change Best Practices in Defined Contribution Plan Administration An Implementation Schema Costs
Current Practices
Currently, there are two plans and administration infrastructures in place. The definedbenefit plan, available to State and local government employees, is administered in-houseby PERD using a mainframe-based system developed internally by the Department ofAdministration and maintained by the State's IS Division. Payroll cycles, run for themost part biweekly, are transmitted monthly to PERD; refund information is transmittedmonthly for processing with biweekly payroll. The State feed is electronic; the localgovernment feeds take any number of forms including diskette, tape, and paper. Thereare two separate databases maintained _ one for active and inactive (pre-retirement)members, the other for retirees. The retiree database interfaces with the State's warrantsystem to cut checks. The active database is “year 2000”-compliant; the retiree databaseis being reworked to accomplish this. There is little use of newer technologies. Thereis no computer-telephone integration or employee self-service via the Internet. PERDis looking into a Web presence but will only have educational materials and modelingtools on it
The defined contribution plan (457) available to State government and universityemployees, is outsourced by the Department of Administration to Great West Life whichprovides recordkeeper, enrollment and education services. An internal trust has beenestablished with the Department of Administration Director serving as trustee; theAdministrative Division serves as trustor. Other (city and county) employers have 457plans which are also outsourced to 457 vendors.
Administration Requirements That Differ Because Of Proposed PlanChange
The proposed plan change envisions that members will only participate in one 401(a) plan_ either the defined benefit or the defined contribution plan. Existing vested memberswill remain in the defined benefit plan, nonvested members will have the option totransfer into the defined contribution plan. New members will initially participate in thedefined benefit plan and be given the option to transfer into the defined contribution planafter six months. This adds two requirements not normally found in a migration froma defined benefit plan to a defined contribution plan; school districts also have 403(b)plans which are also outsourced.
The transfer of employer and employee contributions (or accrued benefits in other typesof conversions) into account balances normally occurs at migration time and isaccompanied by a blackout period. The proposed design would require that for newemployees these migrations occur on an individual by individual basis, each with itsown blackout/reconciliation period. (The blackout period is a period during whichno transactions may occur as funds are transferred. This will be discussed more fullyin the Conversion section of Best Practices.)
Employee communications and education for pre-enrollment purposes need to becontinuous instead of one-time or scheduled.
Best Practices in Defined Contribution Plan Administration
Administration and Recordkeeping
Some of the features we are seeing emerging as “best practices” in the administration andrecordkeeping areas involve the effective use of technology:
Almost all providers have moved to a paperless environment for their recordkeepingservice centers. Using both archival and workflow imaging, they are able to movework and share work more effectively. Paper no longer is lost or misfiled ormisdirected.
Employers and sponsors are able to gain online access to the data they need to generatereports without involving the systems personnel.
As the cost of online storage has decreased, the amount of data available online hasincreased. It is not uncommon to find several years of transaction history availableimmediately on the system where before data more than one year old was normallyarchived.
Many of the systems can perform both cash accounting for funds with balances expressedin dollars and share accounting for those expressed in units.
Employee self-service (which will be discussed below under Systems) brings with it anincreased need for security. Personal Identification Numbers (PINs) and passwords(and the requirement that they be changed) are universally used.
Some, but not all, of the “world class” providers can provide qualification services fordomestic relations orders.
Systems
Before discussing what is state-of-the-art in defined contribution systems, it is importantto state what won't differentiate among vendors. All of them use technology effectively. All of them have some form of computer-telephone integration and interactive voiceresponse. All of them claim to be “world class”. The evaluation of a provider's systemscapabilities, therefore, while extremely important, should not be viewed as other than astep in due diligence. Nor can systems be viewed as a “black box”. Penalty provisionscannot restore participant faith in the plan. Three items which should be evaluated arethe overall systems architecture, the tools used, and security.
Overall systems architecture. Most, if not all, of the large, investment sector vendorsbegan providing service with licensed versions of Sungard's Diatron as theirrecordkeeping system. There are some that subsequently built their own proprietarysystems to move into a client-server environment before Sungard updated Diatron, butthere is very little difference between base recordkeeping systems.
Most plans are moving toward employee self-service as a means of driving costs down. (For the service providers, be they pension plan recordkeepers, prescription drug plans,or Web-based stores, there is a cost shift from ongoing costs to implementation costswhich are then amortized. The net result to the purchaser is still lower due to thedecreased ongoing manpower costs required to provide service.) Various means existto provide such service and many vendors can customize their offerings to provide morethan one means into their center for plan members:
Interactive Voice Response (IVR) Kiosks Internet
Each of these methods has its own cultural “baggage” making it more or less effectivefor specific member groups or locations. All of these have the advantage that they areavailable to members 24 hours a day, 7 days a week. All have security risks (e.g.,member identification before providing data) that must be addressed.
Tools used. State-of-the-art tools without a coherent vision of the future systemsarchitecture doesn't provide enhanced service. Some providers are able to offer true“world class” service with older, mainframe-based systems because they leverage theright technologies.
Security. Physical and data security should be primary concerns of all providers. Withthe drive toward employee self-service, there is an increased need to secure data fromparties other than the participant.
Some additional points concerning the use of technology are needed here. In the systemsarea, more than anywhere else in administration services, state-of-the-art is a movingtarget. “Most providers” today will become “all” tomorrow. Other providers, withouta well-defined vision will find all the cul-de-sacs. Points to consider in evaluatingsystems best practices include:
Interactive Voice Response (IVR) and Voice Recognition Unit (VRU) installations rangefrom the relatively simplistic call distribution scripts to full voice response capabilitiesreciting account balances and confirming transactions and even to recognizing spokenrather than keypad input. These can be accessible from any location by anyone witha touch-tone phone. Kiosks are valuable for centralized locations. They can be made standalone, withoutaccess to financial or demographic databases (and accompanying security risks) andused for education or limited modeling purposes, or linked to employee databases toprovide transaction capabilities.
Internet access is available from some providers to allow plan participants to executetransactions.
There is no clear consensus among the providers on whether data centers and participantservice centers (“call centers”) should be co-located. From a security standpoint itis frequently better to have the centers separated; however, the personnel need tocommunicate and often the customer service and software development personnel areco-located at the service center with computer operations personnel only remotelylocated.
Most providers are moving to a client-server environment and integrating their productofferings using one common look and feel. Hence, a single customer service rep canprovide service for both defined benefit and defined contribution plans with littleadditional training. Integrated case management and context sensitive help arecommon. Integrated case management allows the uniform application of methods andprocedures to all cases, guided by the system. For example, all the steps requiredto effect a retirement such as package mailing, joint and survivor election, processingfor initial payment, etc., are imbedded in the administration system. The system thenmaintains current status, calls up the case as appropriate, provides daily “to do” listsfor the representative, escalates unresolved issues, etc. Context sensitive help ensuresthat responses are both current and consistent. Summary plan descriptions,prospectuses and scripts are available online so that all call center personal haveaccess to current information and policies. All of these drive to a scenario in whichthe plan participant accomplishes most transactions and inquiries in a self-servicemode, only speaking with a representative when there is a true value to be added bythe rep.
Any provider who expects to stay in business will have a robust, tested disaster recoveryand backup plan in place. If they do not have their own redundant sites they oftencontract with IBM, Sungard or Comdisco to provide such services.
Participant Services
With the move to value-added services provided by the call centers, we are also seeingthat more of the representatives employed are college graduates. This creates a careerpath problem for some providers with service center work seen as an apprenticeship. Average age of the staff is lower as is experience. Many providers have institutedformal training or certification programs for the representatives. These programs lastseveral weeks; previously much of the training was on-the-job.
Quality control has also been improved. Some providers are seeking ISO certification oftheir methods, processes and procedures; all have documented methods and proceduresin place with provision for continuous process improvement through sampling, silentmonitoring of calls, call recording, etc.
As mentioned previously, IVR is being used to supplement or replace live representativesfor many of the services provided. Typically, we see the following services providedonline:
Account balance inquiry Transaction review/account information Plan literature requests Fund performance inquiries Inquiries regarding share prices Executing fund transfers Electing or changing contribution rates Changing investment options Initiating loans Modeling loans Reviewing loan balances Enrollment
Conversion Conversion to a new plan needs to be a joint effort of the provider and the sponsor;hence, best practices dictate that a team be established, similar to the one used in avendor search, to serve as subject matter experts to the provider. In some cases, theproviders also advocate the use of plan sponsor personnel as project coordinators.
Blackout periods, the time after asset transfer when no transactions may occur, vary from2 to 4 weeks. For the proposed State of Montana plan, it will probably be on the shorterend since primarily nonvested participants will have assets transferred. Additionally,since the transfer is from a defined benefit plan to a defined contribution plan, there areno transactions in the former plan which need to be suspended. In this scenario, theblackout period merely serves as a period during which the individual balance arereconciled in the new MPERS. However, there will be a need for individual blackoutperiods when new participants transfer from the defined benefit plan to the definedcontribution plan and for a plan-wide blackout when investment option availability ischanged.
Communications
All providers offer some form of off-the-shelf communications and education programsand campaigns for both transition and ongoing needs. Some have the capability to tailorthese to the sponsors needs. The participant education aspect is also available throughseparate financial services companies. Normally, these communications materials arebroken into five components:
Pre-enrollment materials Enrollment materials Prospectuses and other fund information Termination (e.g., retirement) materials Procedural materials (transactions, etc.)
Investment Options
For a fee, most providers are able to provide access to any portfolio design desired. Dueto subsidy arrangements, they are usually most cost-effective with funds that theymanage. Almost all providers can establish self-directed accounts which allowparticipants to invest in any ERISA-qualified stock or mutual fund with an annualadministration fee passed on directly to the participant.
An Implementation Schema
Decision Points
There are several decisions that need to be made before developing a finalimplementation plan:
Build or buy
Does the State have the resources or desire to develop an in-house definedcontribution system or would the needs of the State and the plan participants bebetter served by outsourcing? Several considerations in this decision are that itis usually very difficult to convert an existing defined benefit administrationsystem into a defined contribution administration system and that definedcontribution administration is more labor- or IVR-intensive than defined benefitadministration. There is a need for daily accounting and calculation of values,for processing transactions including the timely transfer of assets, etc. All ofthis is in addition to normal defined benefit-type member services.
Decisions regarding long-term, short-term costs
As discussed previously, the level of employee self-service can result in a shiftto implementation period costs from ongoing costs as IVR scripts, web pages andinterfaces, etc. are developed. Beyond the reduced ongoing cost of employeeself-service this brings the advantage of increased availability of service. Callcenter staffs are only available during contracted periods; IVR and web pages areavailable 24 hours per day, 365 days per year. Members, however, must haveaccess to and be comfortable with using the appropriate technologies (e.g., PCs)to take advantage of disintermediated services.
Availability of staff
Is the staff currently available to provide a comprehensive set of requirementsdocuments for a vendor either during the request for proposal (RFP) developmentor during implementation? Who will maintain these requirements? Is staffavailable to generate and evaluate the RFP? Staffing requirements in-house stillremain even if recordkeeping is outsourced. Payroll feeds need to beconsolidated, reports reconciled, vendors managed, and policies promulgated. Inaddition, during recordkeeper searches, personnel from areas other than theretirement systems area will be needed to supplement the search team.
Bundled or unbundled services
The decision that needs to be made here is whether to purchase services from onevendor or to find several best-in-class vendors and obtain services from them.The decision to unbundle service provision has several cost and serviceimplications. Unbundled services will have multiple points of responsibility andrequire additional internal staff to manage and coordinate the vendors. Theremay also be the loss of the fee subsidy for services not provided by theinvestment manager if there is no rebating mechanism. However, an unbundledapproach does provide additional flexibility in selection and termination ofvendors and more customization and can result in better service levels.
RFI/RFP
Is there a “short list” already available of accredited vendors or will theoutsourcing process require a request for information (RFI) phase first?
Timelines
Attached as Appendices B and C are task definitions for the various phases ofrecordkeeper searches and implementation/conversion. These have been put in Ganttchart form below showing the relative length of time and the interrelationships amongthe tasks. We anticipate that the recordkeeper search will take between eight andtwelve months with implementation taking an additional eight to fifteen months. Thecharts show the shorter duration in the ranges and begin after passage of any enablinglegislation.
Recordkeeper Search
Conversion/Implementation
Costs
The estimated costs for the installation of the defined contribution plan portion of theModified Public Employee Retirement System (MPERS) can be divided into the followingparts:
Education Conversion pre-enrollment Ongoing pre-enrollment Ongoing member education Implementation/conversion Pre-conversion costs (e.g., vendor selection) Conversion costs from vendor Internal staff costs Ongoing administration costs From vendor Internal staff costs
It is difficult to assess the costs for conversion and ongoing service without gettingestimates directly from vendors who have been provided sufficient information from whichto bid as part of an RFP process.
Education services such as retirement planning, portfolio strategy and investment maybe offered bundled or unbundled. Separately contracted costs for providing educationalseminars can range up to $2500 per seminar speaker per day plus travel expenses. Inone sample, two four-hour seminars with about 75 people in each seminar were covered;this translates to costs per individual of approximately $17. Depending upon theanticipated volume of future new hires, alternatives to a live instructor (e.g., videotapedseminars with supplementary phone support) may be employed at reduced cost. Applyingour estimates of an initial conversion being offered to approximately 12,000 nonvestedmembers, pre-enrollment education during conversion is estimated to cost approximately$200,000.
The costs for ongoing education (pre-enrollment, pre-retirement, and othercommunications and newsletters) are included in the .1% fund discussed in theGovernance section. These are based on estimates of 12,000 nonvested members and a“take rate” of 25-50% providing the initial membership in the plan and approximately3,000 new potential enrollees annually with a “take rate” of 75%.
The conversion phase of the project would begin with an RFI/RFP. These recordkeepersearches may be expected to cost in the range of $100,000 to $150,000 depending uponboth time and number of vendors contacted. The actual costs of conversion andimplementation are often borne by the recordkeeper and amortized as part of the annualfee structure with the exception of customization of reports and accommodation ofmultiple data feeds. It is anticipated that these costs will be negligible even with themultiple data feeds anticipated. Internally, staff will need to be diverted to participatein the vendor selection team. Areas such as procurement, accounting and retirementsystems will need to contribute subject matter expertise to the RFP and selection process,to requirements definition, and to the actual conversion. (These steps are described inAppendix B.)
The costs for ongoing recordkeeping and trustee services from bundled providers can beanticipated to range from $5-7 per participant per month. If unbundled providers areused there can be a monthly increase of $2-3 if there is a loss of subsidy from investmentmanagement fees. If self-directed accounts are allowed, the typical annual administrationcharge is $125-150 per participant in addition to the other charges. The servicesnormally included in this fee are enumerated above under Participant Services. Alsoincluded are statements to members. Using our previous estimates, these fees willamount to approximately $400,000 in the first year increasing by $200,000 annually asnew members join the MPERS. Additional costs that need to be anticipated are the costsof internal staff to support the MPERS by providing vendor management, data feedcoordination and systems support, reconciliation, policy, etc. However, the size of thisstaff should not need to increase as the size of the membership grows.
VEBA ISSUES VEBA's In General
VEBA's (Voluntary Employees' Beneficiary Associations) are financing vehicles for theprovision of welfare benefits to employees and, in certain cases, to retirees. Unlike a401(h) account (see below) they are not directly related to a pension plan, but ratherstand as a separate entity providing welfare benefits to participants. VEBA's are similarto pension plans, in that they provide a mechanism for pooling the contributions ofemployers and members to provide financial security and guarantees. They differ frompension plans in a number of significant ways:
VEBA's provide welfare benefit payments to active and retired employees; pension plansprovide retirement income benefit payments to individuals only after they have ceasedto be actively employed.
Pension law and regulation are relatively well established; VEBA's continue to havemany areas where issues remain to be defined.
Most pension retirement plans are funded. As various accounting regimens point out theaccrued liability for retiree welfare benefits, VEBA's are becoming increasinglypopular as a method for setting aside assets to mitigate the effects of the growth of retiree welfare benefit liabilities.
Tax Qualification Rules for a VEBA
A VEBA is governed by rules under Internal Revenue Code Section 501(c)(9). IRSregulations under 501(c)(9) govern restrictions on membership in a VEBA, and the typesof benefits that can be covered. Regulations under Internal Revenue Code Sections 419,419A and 512 cover additional rules for funded VEBA's including the tax treatment ofcontributions (for private sector parties) and investment earnings. In addition, rules onthe provision of different types of benefits and the tax consequences to participants areof importance in designing a VEBA. Key sections of the Internal Revenue Code includeSections 105 and 106 with respect to medical plans and the tax treatment of benefitpayments and employer contributions. In addition, Code Section 125 may apply to plansthat exhibit various spending account features.
Members
Membership in a VEBA is limited to employees, former employees, surviving spousesand dependents of employees. To qualify as a VEBA, membership must be deemedvoluntary. This condition may be met in one of three ways: there is no cost formembership; membership is required as the result of a collective bargaining agreement,or as a condition imposed on union membership; or an affirmative act is required tobecome a member. This has implications for a plan that anticipates employee costsharing, or the provision of alternate levels of coverage. Usually, the voluntarymembership requirement may be satisfied by providing a way for the employee to optout of paying premiums - either by setting a low benefit option that is free of charge tothe employee, or allowing employees to opt entirely out of coverage.
There are rules that govern who may be excluded as members of the VEBA. The rulesare extensive and allow many potential plan designs. In general, membership must notdiscriminate in favor of highly compensated employees, officers or large shareholders. Within this main prohibition, employers may set up reasonable rules to excludeemployees based on:
coverage under a comparable plan coverage under a collective bargaining agreement geographic location minimum service requirements maximum compensation requirements minimum hours worked
Benefits
Benefits provided under a VEBA must be life, accident, sick or other benefits. Otherbenefits include severance benefits. Some employers have used the ability to provide aseverance benefit as a mechanism for returning contributions to employees upontermination of employment. However, the regulations on benefits payable from a501(c)(9) account explicitly prohibit the “. . . provision of savings facilities for members. The term “other benefits” does not include any benefit that is similar to a pension orannuity payable at the time of mandatory or voluntary retirement, or a benefit that issimilar to the benefit provided under a stock bonus or profit-sharing plan.” This hasled to employers preferring to provide an equitable severance benefit rather than onedirectly related to unused premium.
The language on other benefits has also led some commentators to suggest that a VEBAshould not be set up to provide a stream of insurance premium payments to an outsideparty, on the theory that this might be construed as reasonably similar to a pension plan. (It should also be noted that the regulations explicitly prohibit payment of accident orhomeowners insurance.) Others have argued that a VEBA may provide for the paymentof insurance premiums under the theory that these are sick benefits covered by the VEBAand that a VEBA may provide these benefits either “ . . . directly by an association toor on behalf of members and their dependents, or . . . through the payment of premiumsto an insurance company, medical clinic, or other program under which members andtheir dependents are [is] entitled to medical services . . ."
For purposes of postretirement medical funding, coverage is broadly interpreted toinclude: Medicare Part B premiums; amounts paid for diagnosis, cure, mitigation,treatment, or prevention of disease, or for the purpose of affecting any structure orfunction of the body; or transportation to/from medical care. For purposes ofpostretirement funding, life insurance coverage is broadly interpreted to include any otheremployer sponsored death benefit. Retiree benefits may only be funded through theVEBA to the extent that retiree benefits are non-discriminatory.
Tax Issues With Respect to Members
Rules on discrimination apply to VEBA's that accumulate assets (rather than one whichacts merely as a conduit for payment). Under these rules, availability and amount ofbenefits must be offered to employees on a basis that does not discriminate in favor ofhighly compensated individuals. Specifically, benefits must be provided to aclassification of employees set forth in the plan which does not discriminate in favor ofhighly compensated individuals. The types of benefits provided must also be non-discriminatory in nature. Further, benefits may not be based on pay in excess of$160,000 (this is the 1998 limit, it is periodically adjusted for inflation in subsequentyears).
Contributions to the VEBA for key employees (including officers of the employer) triggerspecial rules: benefits for each key employee must be paid from separate subaccounts, and contributions on behalf of key employees are treated as annual additions to theemployee's defined contribution account limit under 415(c). Thus, key employees are limited in total allocation to the VEBA and to other accounts. (Note, however, that all allocations to the 401(a) defined contribution plan will be treatedas annual additions in a similar manner.).
Medical benefits are not taxable to the employee when paid. Contributions made by anemployee to a VEBA are taxable, but contributions made by the employer are not. Thusone open area under the internal revenue code is the treatment of employee contributionsthat are made as a one-time election upon employment. Unlike pension plans, wheresection 414(h) explicitly addresses the taxability of these amounts, the tax-free status ofthe employer contribution to the VEBA is not as clearly set forth, when the employeechooses the treatment as a condition of employment. Under Section 105 of the Code,employees are not subject to tax on the benefits paid from a nondiscriminatory employerprogram. Similarly Section 106 of the Code excludes the value of the contribution to themedical plan by an employer on behalf of an employee. These form the basis for a rulingthat the employee, by accepting a package of benefits as a condition of employment,should be taxed as any other employee, but the tax underpinnings are less secure thanunder 414(h) as it applies to pensions. (Note, however, similar issues were addressedin the most recent set of 401(k) regulations.)
Retiree plans that have set up individual accounts also need to avoid characterization asflexible spending accounts under Internal Revenue Code Section 125. Generally, thisprovision allows employers to set up flexible spending accounts that may be used toprovide medical benefits on a tax-free basis. However, any amount remaining in theaccount at the end of a plan year is required to forfeited under these rules. Thus it isimportant that any VEBA account avoid characterization as a flexible spending accountplan that is subject to Section 125.
Alternative Approaches
The proposal recommended is not the only mechanism available to Montana for theprovision of retiree medical benefits to employees. There are also stand-alone programsoffered by at least one 457 plan vendor. Alternatively, the pension plan could beamended to provide what is known as a 401(h) retiree medical subaccount. Theseoptions are discussed in more detail below.
457 Vendor VEBA Accounts
PEBSCO, which already offers 457 plans to various employers within Montana, hasbegun to offer a employer VEBA plan in the past several years. Under ourunderstanding of the PEBSCO plan, enrollment is automatic for all employees, theemployee directs the investment of the assets using a variable annuity investment vehicle,and the account may be drawn down to pay for premiums to any medical plan, or forretiree benefits. Due to the desire to have flexibility by employees in electing this benefitat hire, this product does not currently appear to meet all the objectives of the CPERSin this area. However, it might be possible to approach this or other vendors active inthe 457 market to provide a tailored product of this nature that more closely match theneed for flexibility identified as part of H.B. 90.
401(h) Accounts
Instead of a VEBA, it might be possible to set up a 401(h) account under the pensionplan to provide medical benefits. Internal Revenue Code Section 401(h) allows thecreation of an account within a qualified pension plan to pay for sickness, accident,hospitalization and other medical expenses of retirees under the pension plan. Theseparate account is closely linked to the pension plan. Thus, it can be used only toprovide for benefits that are payable after retirement, and only those persons who areeligible to receive benefits under the pension plan (and their dependents) may receivebenefits from the 401(h) account. Many of the unsettled issues in the VEBA area arerelatively more settled for 401(h) accounts, since they are technically part of a pensionplan.
Under the IRS regulations, a 401(h) account may not discriminate in favor of theprohibited group of employees and any payments to key employees must be made fromseparate subaccounts from within the 401(h) account. (Basically, the 401(h) accounts aresubject to the pre-Tax Reform Act non-discrimination rules.) Just as with a VEBA,contributions to subaccounts for key employees serve to reduce the amount that may beallocated to qualified sponsored savings plans for these employees, and could reducefuture pension payments from the qualified pension plan if the employee retires before2000 (or if Congress changes its mind about 415(e) repeal in the year 2000). Unlikepension benefits, health benefits are not required to be vested and may be reduced,eliminated or modified without subjecting the plan to sanctions under the InternalRevenue Code.
Benefits are not taxable to participants when paid. While 401(h) accounts can explicitlybe set up as defined contribution type plans, benefits may only be paid out as medicalbenefits. Thus return of contributions to employees that leave prior to retirement istypically through the provision of medical benefits.
Contributions to a 401(h) account are restricted by a formula based on the amount ofpension contributions. The rule provides that the contribution allocated to the 401(h)account plus any part of the pension contribution attributable to death benefits may notexceed one third of the contribution made to the pension plan for pension benefits,excluding contributions allocated to past service credits. An equivalent statement is thatthe 401(h) and death benefit contributions may not exceed one quarter of the totalcontribution to the pension plan including 401(h) contributions and excluding past servicecredits. Under current actuarial assumptions and methods, this limit would not appearto restrict the ability to utilize a 401(h) account to finance retiree medical accounts forparticipants. However, changes in rates of return, full funding of the pension plan orother unpredictable events could alter the contribution pattern of the pension plan in thefuture. This has the potential to make the 401(h) contribution that is available somewhatunpredictable for defined benefit plans. Thus, it was not recommended as a primarysolution under H.B. 90.
Costs for State Plan
At the last CPERS meeting, concerns were raised about the costs that might be incurredby the state if more former employees and retirees receive benefits from the plan. Ifformer employees are allowed to use VEBA monies to purchase participation in the StateHealth Benefits Plan it is anticipated that participation by former employees will increasesignificantly. To the extent the price charged for participation in the plan is less thanthe anticipated benefits for these types of members, state health costs would rise.
Absent a VEBA, plans that provide continued access to retiree medical benefits forformer employees typical include one or two classes of individuals:
COBRA continuation coverage. Federal law mandates that employers allow employeesto continue health plan coverage for a limited period after termination ofemployment. Employers can charge a premium for the coverage that is no greaterthan 102% of the average cost of the plan. A number of studies have shown that the2% extra premium charge is insufficient to cover the extra cost of this group. Thegroup tends to be high cost for a number of reasons including:
Healthy former employees are more likely to move to another job and coverage providedby a subsequent employer
COBRA rules allow employees to elect coverage retroactively at first, so that at the startof the coverage period employees can actually see whether they get sick beforepurchasing coverage.
In many instances COBRA employees are older, and so likely to have higher averagecosts.
Retiree medical coverage. Some employers continue to provide this coverage at theaverage cost of the plan to all participants. Others charge an adjusted cost thatreflects the greater average cost of the plan for retirees who are older and may havegreater utilization of services than the general employee population. Based oncomments at the last CPERS meeting, there appears to be some uncertainty whetherMontana law requires that retirees be offered coverage at the average population rate,and different employers have taken different approaches to the establishment of pricescharged to these individuals.
The above two groups of covered former employee reflect two major sources of potentialincreased costs due to allowing former employees into the plan:
Selection Age rating subsidies
Of these two items, it appears to be possible to eliminate any additional cost to the statedue to age rating subsidies. Age rating subsidies arise when an older group, such asretirees, is charged a rate based on the claims experience of the entire population of theplan. While, based on comments at the last CPERS meeting, it may be unclear whetherexisting law prohibits charging retirees a different cost for health benefits than activeemployees, clarifying changes in the statute could be made to clearly allow this type of(common) practice. However, existing retirees and those close to retirement may havegrown to depend on the availability of an age rating subsidy for those employers thatoffer one. These employers may wish to make any change in age rating subsidygradually to avoid disrupting settled expectations. However, given the long term periodlikely to be necessary before a large number of participants have accumulated significantbenefits under the VEBA, it would appear possible for these employers to graduallyadopt the premium pricing policies that reduce the average amount of age rating subsidyto reflect the greater number of individuals in the plan. Barring such a change, theaddition of a VEBA that makes it easier for individuals to save money to pay thepremiums required for the state health benefits plan, will increase the costs of the statehealth plan.
Increased costs due to selection are less likely to materialize as a result of allowing non-retiree participants to purchase medical insurance with VEBA account assets. Theseparticipants are likely to be healthier than the average COBRA purchaser, and so wouldreduce average costs compared to those of COBRA. In addition, the state and otheremployers could explicitly price policies after the COBRA continuation period to recoverany additional costs for this group.
As an alternative, the VEBA could be set up solely as a reimbursement accountmechanism, or similar to an MSA, as a reimbursement mechanism with a catastrophiccoverage plan provided by the state as a separate option under the state health benefitsplan. Allowing the accounts to be used for direct reimbursement of medical expenseswill increase the administrative costs of the plan, but it should be possible to contractwith insurers or other plan administrators to delegate the administration of the retireeclaims processing. As the MSA market matures, we expect to see many additionalopportunities for outsourcing this part of the administration of this plan.
BENEFITS SURVEY RESULTS As part of the focus groups performed in December 1997, plan participants were askedabout both their preferences for various communications methods and their level ofbenefits knowledge. The survey is attached as Appendix A. We analyzed 243 responsesin total. Of these 234 provided age/service data.
Knowledge of Benefits
Most respondents (in excess of 65%) felt they understood their benefits; however, lessthan 10% felt they understood their benefits very well. Understanding was highestamong 50-60 year olds and among those with 20-30 years of service
Knowledge
Very
Some-
Not Very
Not at
No
Total
Number
Age
Well
What
Well
All
Response
Of Ees.
<30 Years Old
0.00%
0.00%
0.00%
0.00%
0.00%
---
0
30 - 40 Years Old
8.10%
59.05%
28.57%
4.29%
0.00%
100.00%
49
40 - 50 Years Old
8.72%
53.90%
34.40%
2.98%
0.00%
100.00%
102
50 - 60 Years Old
10.95%
60.95%
26.64%
1.46%
0.00%
100.00%
64
60+ Years Old
10.98%
46.34%
31.71%
0.00%
10.98%
100.00%
19
All ages combined
9.38%
56.29%
30.84%
2.59%
0.90%
100.00%
234
Knowledge
Very
Some-
Not Very
Not at
No
Total
Number
Service
Well
What
Well
All
Response
Of Ees.
<5 Yrs. Service
0.00%
46.90%
53.10%
0.00%
0.00%
100.00%
34
5 - 10 Yrs. Service
5.44%
53.56%
30.54%
8.79%
1.67%
100.00%
56
10 - 15 Yrs. Service
8.13%
67.46%
22.49%
1.91%
0.00%
100.00%
49
15 - 20 Yrs. Service
8.02%
52.47%
39.51%
0.00%
0.00%
100.00%
38
20 - 25 Yrs. Service
18.40%
63.19%
18.40%
0.00%
0.00%
100.00%
38
25 - 30 Yrs. Service
32.81%
46.88%
14.06%
0.00%
6.25%
100.00%
15
> 30 Yrs. Service
0.00%
50.00%
50.00%
0.00%
0.00%
100.00%
4
All svc. combined
9.39%
56.34%
30.77%
2.60%
0.90%
100.00%
234
Communication Methods
Clearly, PERS News is well-received and is the preferred medium for benefitscommunication with 96.2% of the respondents ranking it first or second. Meetings alsowere rated high. On the opposite end of the spectrum is the Internet which does notappear to have much appeal.
Method
PERS
Rank
News.
Internet
Video
Meetings
Other
1.
80.0%
9.2%
0.7%
28.8%
18.5%
2.
16.2%
19.7%
11.7%
42.4%
11.1%
3.
3.3%
23.2%
50.4%
18.1%
11.1%
4.
0.5%
44.4%
35.0%
10.2%
11.1%
5.
0.0%
3.5%
2.2%
0.6%
48.1%
APPENDIX A PERS Survey for Employee Focus Group Participants
How well do you understand the current PERSbenefits? ___ very well ___ somewhat ___ not very well ___ not at all
Please rank the following communication methods forinformation about PERS benefits and possible changes (1 is the method you like best): ___ PERS newsletter ___ internet ___ video ___ meetings ___ other (specify) _________________
Please provide the following confidential information about your retirement plans: Are you currently married? ____yes ____no If so, is your spouse covered by a retirement plan at work? ___yes ____no What are your current retirement plans: Age at which you plan to retire _______ What percent of your current pay do you expect to need to live on in retirement? ____% Roughly what percentage of your retirement income do you expect to come from the following sources? ___________% Continued employment _________% Your pension from PERS ___________% Spouse's Pension Benefits _________% Social Security ___________% Personal Savings _________% Other
Excluding PERS, what percent of your anticipated retirement have you already saved? ______% Are you eligible to participate in a deferred compensation plan? ___ yes ___no If so, how much are you currently contributing to the plan each month? _________________ How do you invest your savings outside the PERS plan? __________% Stocks __________% Guaranteed Income __________% Bonds __________% Money Market or Bank CD's __________% Other
Follow Up Survey To Be Completed At End Of Session
Please rank the following features of the current planfrom 1 to 7, with 1 representing the most importantfeature to you: ___ benefit levels ___ benefits at regular (normal) retirement ___ early retirement benefit ___ the amount of my contributions to plan ___ the amount of my employer's contributions toplan ___ guaranteed level of benefit ___ automatic benefit increases after retirement ___ other (please specify): ______________ _________________________________
The following features are possible plan changes. Please rank them from 1 to 8, with 1 representing themost important feature to you: ___ higher monthly benefits ___ ability to receive benefit in a lump sum ___ ability to transfer service credit between PERSand other employers ___ choices about how my contributions areinvested ___ choices about how my employer's contributionsare invested ___ benefit choices that allow a monthly pension forlifetime or with the ability to continue benefitsto a spouse ___ guaranteed level of benefit ___ automatic benefit increases after retirement ___ other (please specify): ______________ _________________________________
Would you be willing to yes no ___ ___ have a smaller benefit if yourcontributions were lower? ___ ___ pay larger contributions if yourretirement benefits were bigger?
How well do your employees understand their currentPERS benefits? ___ very well ___ somewhat ___ not very well ___ not at all
Please rank the following communication methods forinformation about PERS benefits and possible changes1 is the most effective method: ___ PERS newsletter ___ internet ___ video ___ meetings ___ other (please specify)____________________________________________________
Follow Up Survey To Be Completed At End Of Session
Please rank the following features of the currentplan from 1 to 7, with 1 representing the mostimportant feature to your employees: ___ benefit levels ___ benefits at regular (normal) retirement ___ early retirement benefit ___ their contributions to plan ___ their employer's contributions to plan ___ guaranteed level of benefit ___ automatic benefit adjustments afterretirement ___ other (please specify):_______________ _________________________________
The following features are possible plan changes. Please rank them from 1 to 8, with 1representing the most important feature to youremployees: ___ higher monthly benefits ___ ability to receive benefit in a lump sum ___ ability to transfer service credit betweenPERS and other employers ___ choices about how employee contributionsare invested ___ choices about how employer contributionsare invested ___ benefit choices that allow a monthlypension for lifetime or with the ability tocontinue benefits to a spouse ___ guaranteed level of benefit ___ automatic benefit adjustments afterretirement ___ other (please specify):_______________
Please rank the following features of the currentplan from 1 to 7, with 1 representing the mostimportant feature to you as an employer: ___ benefit levels ___ benefits at regular (normal) retirement ___ early retirement benefit ___ their contributions to plan ___ their employer's contributions to plan ___ guaranteed level of benefit ___ automatic benefit adjustments afterretirement ___ other (please specify):_______________ _________________________________
The following features are possible plan changes. Please rank them from 1 to 7, with 1representing the most important feature to you asan employer: ___ higher monthly benefits ___ ability to receive benefit in a lump sum ___ ability to transfer service credit betweenPERS and other employers ___ choices about how contributions areinvested ___ benefit choices that allow a monthlypension for lifetime or with the ability tocontinue benefits to a spouse ___ guaranteed level of benefit ___ automatic benefit adjustments afterretirement ___ other (please specify):_______________
APPENDIX B Generalized Timeline: Provider Search
The first major task in establishing a defined contribution plan, assuming itwill be outsource, is to find an appropriate outsourcing partner. Thelength of time required for the search is dependent on several factorsincluding:
The number of providers to be considered
Based on the decision whether or not to entertain bids fromunbundled providers, there are any number of players in the definedcontribution marketplace. A preliminary screen, using input fromother governmental plans, may be useful in limiting the amount oftime and effort devoted to analyzing responses from vendors thatmight otherwise have been excluded.
The thoroughness of the RFP
A less-than-thorough RFP may easily be supplemented by bidders'conference. However, it must be emphasized that all bidders mustreceive, in writing, the same information and that the net effect ofthe using a bidders' conference to supplement a less-than-thoroughRFP may be pressure to extend the response date.
The amount of time provided for RFP turnaround
Two additional tasks are usually embedded in the RFP turnaroundtime _ a period to submit written questions or requests forclarification and bidders' conference. While most vendors will have“canned” response to many of the RFP questions, they need to beafforded ample time to customize the response to your needs and toensure that they fully understand the requirements. If the questionsaren't understood and answered during this phase, they will surfacelater in the process as disconnects.
The amount of time for various analysis and decision phases
A team will need to be assembled to evaluate the responses received. Areas that need to be represented include systems,contracting/purchasing, and administration and objective criteria(scoresheets help) need to be determined in advance. Decisions suchas how to handle incomplete or unclear responses should also bepredetermined. (Call the vendor? Dismiss the response?) Sufficienttime needs to be available here to ensure that the responses (whichare often voluminous) are thoroughly evaluated.
The number and amount of time devoted to provider presentations andsite visits
After pruning the response list, providers will be invited to makepresentations and the team will make site visits. It is normal for apresentation to last at least one half day and for site visits to takea full day plus any requisite travel time.
Based on previous searches for a plan the size of the State of Montana'sand given some of the factors above, we can anticipate a search time of 8to 12 months. The steps in the search phase include:
Defining objectives and selection criteria
Prior to beginning the search, clear objectives (answering at aminimum what and when) need to be established along with objectivecriteria for selecting a provider or providers. Subject areas need tobe prioritized at this time and relative values established. Is cost theoverriding concern? Are participant services more important thandisaster recovery?
Sending confidentiality agreements and RFI
Normally, confidentiality agreements are required prior to supplyingany information to prospective providers. When this is done, the RFIis sent out “blind”, i.e., through a third party without specifying whois the ultimate buyer of the services.
Reviewing responses and finalizing “short list”
While not as detailed as an RFP, the RFI should contain enoughdifferentiating questions to serve as a filter and determine whichproviders cannot meet the needs of the State.
Finalizing and sending RFP
Based on the list of eligible providers, the RFP can then be tailoredto ensure that it serves to differentiate among the providers. Specific areas of concern in the RFI responses can be explicitlyaddressed, for example the ability to deal with multiple payrolls andpayroll cycles.
Responding to submitted questions and bidders' conference
No matter how well-written and well-reviewed the RFP is, there willbe a need to clarify points which appear ambiguous to the providers. A cutoff date for written submission of questions needs to beestablished during the RFP response period, and written responses tothe questions provided to all. A mandatory bidders conference canbe used to supplement to or in lieu of the written responses.
Reviewing responses
The team of subject matter experts assembled for the selectionprocess then would analyze the responses and grade them using thecriteria established in advance coming up with what approximates anobjective score for each provider. The list is then further pruned toa set of viable candidates.
Vendor presentations
Each of the viable candidates is afforded a minimum of one half dayto make a formal presentation of their proposal and to answerquestions about it. Normally, this takes the form of a presentation,followed by a question and answer period, then break-out sessions forthe subject matter areas (systems, participant services, contractnegotiation, etc.) and a final summarization session. Sufficient timeshould be devoted prior to the first such provider presentation toprepare a set of questions to be answered and checklists to becompleted by the subject matter experts. Immediately after eachprovider's presentation, the team should assemble and review theanswers received and additional questions raised. Hence, a half-daypresentation could result in dedicating a full day per provider.
Site visits
As with the provider presentations, the keys to successful site visitsare preparation of questions in advance and a recap immediatelyafter the visit. Unfortunately, the team may need to be split for sitevisits _ often the data center and the participant service center arenot co-located. Travel time also needs to be factored in, so onlyinfrequently will more than one site visit be possible in a day. Theobjectives of the site visit are to actually see the vendor in action,to see how calls are handled and to meet other than the marketers. The systems site visit can evaluate security and disaster recoverymore readily during a site visit.
Selection of finalist
The final step in the selection process is building the business case forthe selection of the finalist. If each of the preceding steps has beenaccomplished on as objective a basis as possible, team consensusshould be relatively easy to obtain.
APPENDIX C Generalized Timeline: Implementation and Conversion
The length of time required for implementation and conversion (there is aconversion phase in the proposed design for the nonvested participants only)is affected by:
Number and design of system interfaces
The amount of time required to implement the new plan services isdirectly related to the amount of programming that will need to bedone. While the relationship between number of systems interfaces(payroll feeds especially) required and the time expended is notentirely linear, each interface will need, as a minimum, some time foranalysis.
Plan complexity
The complexity of the plan and especially the administrativerequirements implicit in it will have a major impact on systems andparticipant services implementation time.
Data quality
A decision needs to be made about tolerance levels in data qualitygoing in and about the amount of time to expend in scrubbing databefore bringing the new provider on line.
Communications plan
Member communication needs to be an ongoing process during themigration to a new plan and administrator. Expectations, andapprehensions, need to be managed to ensure that participation levelsare maintained and call volumes are minimized. If you don't keepthem informed, the rumor mill will!
Education plan
Along with member communications, member education needs to beginearly in the process. Existing participants in the defined benefit planneed to be educated about managing their own investment portfolioand how the balances in their defined benefit plan will be affected.New participants need to understand investment principles andpractices. You are expecting them to assume the investment risk in aDC plan. To fulfill your responsibility as a fiduciary and ensureparticipant satisfaction and high participation, the members need tounderstand how to assume this risk effectively.
Once again, based on previous searches we can expect an elapsed time ofapproximately 8 to 15 months to implement and convert. Some of the tasksto be accomplished during this time include:
Development of requirements
Here some time may be saved by having begun requirements definitionduring the RFP phase. During this phase, the requirements will alsobe modified as neededwith the assistance of the selected provider toserve as documentation of the relationship and expectations.
Analysis and programming of requirements
Working from the documentation/requirements, above, the providerwill make necessary changes to their systems, reports and interfacesto accommodate the State's plan.
Development of administrative procedures and guidelines (e.g.,withdrawals, loans and distributions)
Also working from the documentation and requirements, the methodsand procedures in place to provide participant services will need tobe modified.
Planning for the handling of transition month contributions andtransactions
It is normal for there to be a “blackout period” requirement duringimplementation to allow for balancing and reconciliation. In thisperiod no transactions may be entered other than normal payrollfeeds. The duration and timing of the blackout period need to becommunicated to the participants.
