1. 1 Mid-Atlantic Plan Sponsors (MAPS) Trustee Educational Conference June 9, 2011 What Type of Retirement Plan Do You Want & Can You Afford It? David Boomershine – Senior Actuary

2. 2 Background – Retirement Plans Types of Retirement Plans Retirement Program Objectives Cost Volatility Issues Alternative Plan Designs Retirement Benefit Comparisons Cost Comparisons Plan Comparison Summary Current Public Sector Plan Changes – Questions? DB to DC Plan Transition Issues Other Current Issues Agenda

3. 3 Competitive Attract employees Tax break Reward employees/employee appreciation So employees can retire Contribute to society Background Employers sponsor retirement plans – why?:

4. 4 Ideal employer sponsored retirement program: - Defined Benefit Plan (DB) – Base - Defined Contribution Plan (DC) – Supplemental Combined program provides blend of security, flexibility for employees Background

5. 5 Types of Retirement Plans Defined Benefit (DB) Plans - Lifetime benefit based on formula - Career average pay plan (ex. 1.0% of pay for each year of service) - Traditional final average pay plan – recent significant issues (ex. 1.5% of 5-year final average pay times years of service)  Benefit accruals are “back loaded” - Public Sector – typically includes employee contributions, on a pre-tax basis - Employer has investment risk

6. 6 Types of Retirement Plans Defined Contribution (DC) Plans - IRC Section 457 Plan - Employee and/or employer contributions - Account balances grow with contributions and investment income (gains and losses) - Employee has investment risk - Typical lump sum payout of account balance

7. 7 Types of Retirement Plans Hybrid Plans – Cash Balance (CB) Plans - Hypothetical account balance grows with contributions and interest credits - Conversion to lifetime benefit at retirement - Lump sum can be paid out - DB plan with DC features - Benefit earned more evenly over career - Employer has investment risk Note:in Public Sector, Hybrid Plan can also mean a combination of a DB Plan and a DC Plan

8. 8 Types of Retirement Plans General Plan Comparisons DB PlansDC PlansHybrid Plans Lifetime retirement incomeYesNoYes Retirement income determinableYesNoYes Easy to understandNoYesMixed PortableNoYes Investment control and riskEmployerEmployeeEmployer Level of paternalismHighLowMixed Level of cost and liability volatility for Employer HighNoneLow

9. 9 Retirement Program Objectives Summary - Primary Objectives Competitive benefits Affordable benefits – within financial structure/budget Minimize cost and funding volatility Maintaining current benefit levels, as much as possible, for current employees Retirement Program Objectives

10. 10 - Secondary Objectives  Creation of cost awareness and appreciation among employees  Attraction and retention of qualified personnel – especially certain skilled employees  Attaining maximum tax efficiency in delivering benefits  Encouraging benefit responsibility – employee sharing the cost of retirement financial security  Developing more choice – employee benefit control Retirement Program Review

11. 11 Cost Volatility Issues – Pension Plans Cost Volatility Issues - Concern about DB plan funding and accounting volatility due to fluctuations in:  Valuation interest rates; i.e. the interest rates used to value plan liabilities and costs to determine required cash contributions  Asset returns (i.e. Market Value of Assets); Plan costs and unfunded liabilities are directly affected as investment returns and asset values go up and down

12. 12 Alternative Plan Designs-Case Study Sample Plans: DB Plan:Benefit Formula = 1.5% times final average pay times service, up to 35 years DC Plan: Employer contribution formula = 7% of pay plus 50% match of employee’s 1 st 6% of pay savings CB Plan: Employer contribution credit = 10% of pay for each year of service

13. 13 Typical Benefit Accrual Patterns 35 45 55 65 Age (Hired at age 35) DB CB DC Accrued Benefit

14. 14 Retirement Benefit Comparisons Sample employees representing a cross-section of active plan population Profile Employee Attained Age Accrued Service Current Compensation I302$35,000 II355$40,000 III409$45,000 IV4512$50,000 V5014$55,000 VI5419$60,000

15. 15 Retirement Benefit Comparisons Replacement Ratios: % of final pay replaced with lifetime pension benefits Profile Employee Attained Age Accrued Service Current Compensation DB Plan DC Plan CB Plan I302$35,00051%38%42% II355$40,00051%38%42% III409$45,00049%36%39% IV4512$50,00046%34%37% V5014$55,00041%30%33% VI5419$60,00043%33%36% Actuarial Assumptions: -Mortality: RP2000 Table -Interest: 6%

16. 16 Cost Comparisons As a % of payroll: DB Plan8.5% DC Plan9.0% CB Plan8.0%

17. 17 Plan Comparison Summary DB Plans are the most cost efficient method to deliver retirement benefits - Retirement Benefits

18. 18 Plan Comparison Summary Why are DB plans more cost efficient? Reward long service – back loading due to final average pay Forfeitures remain in plan – more with DB plans Younger terminations – similar to forfeitures

19. 19 Plan Comparison Summary Conclusions of Case Study: For similar long-term plan costs, traditional DB plans provide about 130% of lifetime benefits provided by DC plans Other studies claim traditional DB plans provide up to 150% more in benefits for the same cost vs. DC plans Career average DB plans provide about 20% more in benefits for the same cost vs. DC plans

20. 20 Current Public Sector Plan Changes Current Questions Not enough cost reduction? Cost/liability volatility concerns remain; especially vs. Private Sector? Future of economy? Changing workforce? More changes coming?

21. 21 Transition Issues If converting from DB plan to DC plan, the following issues must be addressed: Preservation of Accrued Benefits - Projected Benefits? DC Plan – better replacement of DB benefit - Not match only - Not flat employer contribution - Service based employer contribution schedule - Example: - Count past service - Add Match? Employee communications/education - Announcements/other print materials - Benefit comparison statements - Employee meetings Years of ServiceContribution % <53.5% 5 -104.5% 10 – 156.0% 15 +8.0%

22. 22 Other Current Issues Comparison vs. Private Sector Plans Taxpayer concerns - DB plans - OPEB plans Union reactions Capping employer contribution commitment Valuation Discount Rate Basis/Reduction? COLA’s – DC plans

23. 23 Questions?