Overview Strategic considerations of retirement plans Issues we need to explore The role of DHRM

Evaluating DB and DC Retirement Systems Prudent Rationale for a Strategic Business Decision

Summary of Differences

It Starts With Understanding “In order to maximize the effectiveness of their benefits plans, employers must develop a clear understanding of two things: the needs of current and potential employees, and how benefits objectives fit within their overall business strategy”* *MetLife -Study of Employee Benefits Trends, 2006

Critical Issues We Need to Explore Impact a DC plan would have on the recruitment and retention of employees Likelihood of employees choosing a DC plan over the DB plan given the option Cost to the State vs. Employee Appeal Employee security/stability/assurance –What happens to contribution rates? Legal Issues

Retention Employee Retention is becoming increasingly important to companies as a key benefits objective MetLife -Study of Employee Benefits Trends, 2006

Retention Over 50% of employees who voluntarily resigned had less than 4 years of service Only 10% of employees who voluntarily resign have more than 10 years of service (excluding retirement)

Cost to the State The original fiscal estimate for H.B. 377 was an ongoing cost of 18.4 million dollars if all new hires chose a DC plan in place of the DB plan Actual cost is indeterminate without a detailed actuarial analysis because we don’t know how many current employees would convert to a D.C.

Appeal of a DB plan over a DC plan Studies show a statistical correlation between age and plan preference with a crossover point in the 40s. Those younger tend to prefer DC plans while those older tend to prefer DB plans 60% of the State core workforce is over the age of 40

Experience in other states In 2000, Florida offered an optional DC plan. As of 2004, 4% of employees had switched and 12% of new hires elected the DC plan Montana adopted optional DC plan in At the end of the one year election period for existing employees, 3% converted Approximately 38% of Oakland County, Michigan, employees switched to a DC plan when given the option in the mid 1990’s *from URS Conversion from a Defined Benefit Plan to a Defined Contribution Plan Issues Paper, 1/19/07

Employee Assurances If employees opt to switch from a DB to a DC, what guarantees do they have about state contribution rates to the DC? Will the state continue to increase DC contribution rates as DB funding rates increase?

Legal Issues Constitutional issue: potential unconstitutional taking of public employees’ vested property rights –Is the benefit provided by statute –Facial vs. Application challenges Retroactive vs. Prospective operation of amendments Contractual theory of retirement benefits Legislative intent/demonstration of binding offer to employees –Present property interest –Vesting Prepared by the Office of Legislative Research and General Counsel- August 2006

Legal Issues… continued Employee rights to benefits depend on the employee’s status: –Retired employees –Current employees –Future employees Employee opt in or out? Modifications and substantial substitutes Prepared by the Office of Legislative Research and General Counsel- August 2006

The Role of DHRM DHRM sees this as an important Workforce Planning component and will be taking steps to address relevant issues

DHRM Actions Perform exploratory research that will set up a more detailed study –Analyze available retention and termination information –Look for general trends in available data that may indicate where research efforts should be focused

DHRM Actions…continued Work collaboratively with URS to explore the issues –Share relevant data between organizations –Inform each other of research efforts and results

DHRM Actions…continued Initiate an employee survey to get at retention factors –Conduct special survey to determine employee feelings on DB vs. DC plans

DHRM Actions…continued Compile and analyze information from research efforts Make recommendations to policy makers based on findings

Department of Human Resource Management

Questions?