OverviewOverview

Strategic considerations of retirement Strategic considerations of retirement plansplans

Issues we need to exploreIssues we need to explore

The role of DHRMThe role of DHRM

Evaluating DB and DC Retirement SystemsEvaluating DB and DC Retirement Systems

Prudent Rationale for a

Strategic Business Decision

Summary of DifferencesSummary of DifferencesTraditional Defined Benefit Plan and Traditional Defined Contribution Plan

Strategic Considerations Defined Benefit Plans Defined Contribution Plans

Employee Retention

Financial LiabilitiesResponsibility Placed on Employee

Responsibility Placed on Employer

Employer Fiduciary Responsibility

Investment Results

Economic Savings

Personal Retirement Savings

FeesAdministrative ComplexityPortability

Attracts longer/tenured/older employees

Placed on the corporate sponsorVery Little

Significant - investment decisions, financial liability

Significant

Average returns are higher/narrower distribution of

returns

Significantly increases savings rate and the available pool of

national savings

Maximizes savings for retirement

Lower overall feesGenerally high

Not typical

Attracts shorter tenured/younger employees

Placed on the ParticipantSignificant - Voluntary

Less Significant

Higher overall feesGenerally high

Yes

Significant

Average returns are lower/broader distribution of returns

Less significantly increases savings rate and the available pool of national savings

Allows withdrawls and loans before retirement, depleting retirement savings

It Starts With UnderstandingIt Starts With Understanding

““In order to maximize the effectiveness of In order to maximize the effectiveness of their benefits plans, employers must their benefits plans, employers must develop a clear understanding of two develop a clear understanding of two things: the needs of current and potential things: the needs of current and potential employees, and how benefits objectives fit employees, and how benefits objectives fit within their overall business strategy”*within their overall business strategy”*

*MetLife -Study of Employee Benefits Trends, 2006

Critical Issues We Need to Critical Issues We Need to ExploreExplore

Impact a DC plan would have on the Impact a DC plan would have on the recruitment and retention of employeesrecruitment and retention of employees

Likelihood of employees choosing a DC Likelihood of employees choosing a DC plan over the DB plan given the optionplan over the DB plan given the option

Cost to the State vs. Employee AppealCost to the State vs. Employee Appeal

Employee security/stability/assuranceEmployee security/stability/assurance– What happens to contribution rates?What happens to contribution rates?

Legal IssuesLegal Issues

RetentionRetention

Employee Retention is becoming increasingly Employee Retention is becoming increasingly important to companies as a key benefits objectiveimportant to companies as a key benefits objective

MetLife -Study of Employee Benefits Trends, 2006

Retention Retention

Over 50% of employees Over 50% of employees who voluntarily resigned who voluntarily resigned had less than 4 years of had less than 4 years of serviceservice

Only 10% of employees Only 10% of employees who voluntarily resign who voluntarily resign have more than 10 years have more than 10 years of service (excluding of service (excluding retirement)retirement)

0.00 10.00 20.00 30.00

Years of Service

0

100

200

300

400

500

600

Te

rmin

ati

on

s

Mean = 4.4509Std. Dev. = 4.63664N = 3,052

Years of Service for Voluntary Resignations FY04-FY06(excluding Retirement)

Cost to the StateCost to the State

The original fiscal estimate for H.B. 377 The original fiscal estimate for H.B. 377 was an ongoing cost of 18.4 million dollars was an ongoing cost of 18.4 million dollars if all new hires chose a DC plan in place of if all new hires chose a DC plan in place of the DB planthe DB plan

Actual cost is indeterminate without a Actual cost is indeterminate without a detailed actuarial analysis because we detailed actuarial analysis because we don’t know how many current employees don’t know how many current employees would convert to a D.C.would convert to a D.C.

Appeal of a DB plan over a DC Appeal of a DB plan over a DC planplan

Studies show a statistical Studies show a statistical correlation between age correlation between age and plan preference with and plan preference with a crossover point in the a crossover point in the 40s. 40s. Those younger tend to Those younger tend to prefer DC plans while prefer DC plans while those older tend to prefer those older tend to prefer DB plansDB plans

60% of the State core 60% of the State core workforce is over the age workforce is over the age of 40of 40 10 20 30 40 50 60 70 80

Age

0

100

200

300

400

500

600

Nu

mb

er o

f E

mp

loye

es

Mean = 43.63Std. Dev. = 11.675N = 17,553

Average Age of Employees

Experience in other statesExperience in other states

In 2000, Florida offered an optional DC plan. As of 2004, In 2000, Florida offered an optional DC plan. As of 2004, 4% of employees had switched and 12% of new hires 4% of employees had switched and 12% of new hires elected the DC planelected the DC plan

Montana adopted optional DC plan in 2002. At the end of Montana adopted optional DC plan in 2002. At the end of the one year election period for existing employees, 3% the one year election period for existing employees, 3% convertedconverted

Approximately 38% of Oakland County, Michigan, Approximately 38% of Oakland County, Michigan, employees switched to a DC plan when given the option employees switched to a DC plan when given the option in the mid 1990’sin the mid 1990’s

*from URS Conversion from a Defined Benefit Plan to a Defined Contribution Plan Issues Paper, 1/19/07

Employee AssurancesEmployee Assurances

If employees opt to switch from a DB to a If employees opt to switch from a DB to a DC, what guarantees do they have about DC, what guarantees do they have about state contribution rates to the DC?state contribution rates to the DC?

Will the state continue to increase DC Will the state continue to increase DC contribution rates as DB funding rates contribution rates as DB funding rates increase?increase?

Legal IssuesLegal Issues

Constitutional issue: potential unconstitutional Constitutional issue: potential unconstitutional taking of public employees’ vested property rightstaking of public employees’ vested property rights– Is the benefit provided by statuteIs the benefit provided by statute– Facial vs. Application challengesFacial vs. Application challenges

Retroactive vs. Prospective operation of Retroactive vs. Prospective operation of amendmentsamendmentsContractual theory of retirement benefitsContractual theory of retirement benefitsLegislative intent/demonstration of binding offer to Legislative intent/demonstration of binding offer to employeesemployees– Present property interestPresent property interest– VestingVesting

Prepared by the Office of Legislative Research and General Counsel- August 2006

Legal Issues… continuedLegal Issues… continued

Employee rights to benefits depend on the Employee rights to benefits depend on the employee’s status:employee’s status:– Retired employeesRetired employees– Current employeesCurrent employees– Future employeesFuture employees

Employee opt in or out?Employee opt in or out?

Modifications and substantial substitutesModifications and substantial substitutes

Prepared by the Office of Legislative Research and General Counsel- August 2006

The Role of DHRMThe Role of DHRM

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

DHRM ActionsDHRM Actions

Perform exploratory research that will set Perform exploratory research that will set up a more detailed studyup a more detailed study– Analyze available retention and termination Analyze available retention and termination

informationinformation– Look for general trends in available data that Look for general trends in available data that

may indicate where research efforts should be may indicate where research efforts should be focusedfocused

DHRM Actions…continuedDHRM Actions…continued

Work collaboratively with URS to explore Work collaboratively with URS to explore the issuesthe issues– Share relevant data between organizationsShare relevant data between organizations– Inform each other of research efforts and Inform each other of research efforts and

resultsresults

DHRM Actions…continuedDHRM Actions…continued

Initiate an employee survey to get at Initiate an employee survey to get at retention factors retention factors – Conduct special survey to determine Conduct special survey to determine

employee feelings on DB vs. DC plansemployee feelings on DB vs. DC plans

DHRM Actions…continuedDHRM Actions…continued

Compile and analyze information from Compile and analyze information from research effortsresearch efforts

Make recommendations to policy makers Make recommendations to policy makers based on findingsbased on findings

Department of Department of

Human Resource Human Resource ManagementManagement

Questions?Questions?