Retirement program alternatives

On Wednesday, May 19th, I was in Helena for my State Administration and Veterans Affairs (SAVA) Interim Committee meeting. Our day was dedicated to working with Dave Slishinsky and Doug Fiddler, Consulting Actuaries from Buck Consultants.

On Wednesday, May 19th, I was in Helena for my State Administration and Veterans Affairs (SAVA) Interim Committee meeting. Our day was dedicated to working with Dave Slishinsky and Doug Fiddler, Consulting Actuaries from Buck Consultants.

Buck Consultants was selected by the SAVA Committee to help us study our current retirement systems and produce a redesign of the teacher's retirement system as contained in House Bill (HB) 659. Of the State of Montana SAVA retirement plan design project, there were seven retirement program alternatives brought to us for our consideration.

The first alternative was a Revised Defined Benefits (DB) plan which would look at revising our current traditional DB plan with lower benefit percentages, longer final average pay periods, later retirement ages or more severe early retirement reductions, and lower or eliminated cost-of-living allowances (COLAs). Member contributions may be higher to limit the employer's funding requirement volatility.

The second alternative was a Money Purchase DB Plan, also known as a Cash Balance Plan, where member and employer contributions are fixed and credited to the member's theoretical account with a defined rate of interest credit which may be fixed or variable.

Retirement benefits are based on an actuarial equivalent conversion of the account to an annuity and may include COLAs. The assets are professionally managed which typically reduces an employer's funding requirement volatility.

The third alternative was a Combination Reduced DB and Money Purchase Plan where employer contribution funds a modest percentage, typically 1.0 percent, of final average pay at retirement age. Member contribution funds a Money Purchase DB Plan.

Retirement ages, early retirement reduction, COLA and interest crediting rates can be fixed conservatively to reduce employer's funding requirement volatility. The assets are professionally managed.

The fourth alternative was a Pension Equity Plan, where retirement benefits are calculated as a number of credits (example - 10) times years of service at retirement (example - 40) to calculate the percentage (example - 400 percent) of final average salary that is paid as a lump sum at retirement. The retirement benefit can be converted to an annuity and again, the assets are professionally managed.

Employer contribution volatility may remain.

The fifth alternative discussed was a Floor Plan, also known as a Floor Offset Plan. A minimum benefit level is defined in the plan, but the actual benefit paid by the plan is the minimum benefit level less the benefit provided by a Defined Contribution (DC) Plan. DC assets can be professionally managed and the DC offset is based on actual balances or the DC assets can be individually managed and the DC offset is based on theoretical balances.

The sixth alternative was an Inverse Floor Plan, where a portion of contributions fund a DB plan guarantee and the majority of contributions fund a DC plan. If DC balances are sufficient to provide a benefit in excess of the guaranteed level, the DB portion of the plan pays nothing. DC assets are typically invested individually and the employer bears the contribution volatility risk only for the safety net.

The final alternative was a DB Money Purchase Plan Choice where members can choose between a DB plan and a Money Purchase plan.

After reviewing the seven retirement program alternatives with their associated charts, benefits, and challenges of each alternative, the SAVA Committee directed the Buck Consultants Actuaries, to provide further analysis on two of the alternatives, Revising the Defined Benefit Plan and the Money Purchase Defined Benefit Plan. The Actuaries findings will be presented to the SAVA Committee at our June 24th and June 25th meeting.

In examining these two retirement program alternatives in greater detail, we are looking for a viable solution which will help us to meet our constitutional mandate as found in Article VIII, Section 15, Public Retirement System Assets - public retirement systems shall be funded on an actuarially sound basis. Additionally, we will fulfill HB 659's primary objective of recommending to the 62nd Legislature funding and benefit changes in the Statewide Public Employees' and Teachers Retirement Systems which will address the unfunded liabilities in our retirement systems.

Now it's your turn to "Keep in Touch" by contacting me regarding your questions, concerns or just to talk as you would with a friend over a cup of tea. I can be reached via e-mail at pathd13@blackfoot.net or call me at 827-4652 or by mail at P.O. Box 1151, Thompson Falls, Montana 59873.