Fort Walton Beach Council agenda — 08-22-2007 special agenda — reading text

Page 33  t. Travel to public retirement trustees seminars should be encouraged and paid for by the Plan. Comment: It is entirely appropriate that Advisory Committee members attend continuing education courses that are relevant to their duties. If the City Council decides that the Advisory Committee should be performing investment- related functions, then members should be encouraged to attend courses and conferences on investment topics. Retirement Plan Options The City is not required to have any retirement program for its employees. Some options for reducing the City' s retirement costs by restructuring its retirement program for general employees are summarized below. The City should obtain a comprehensive actuarial analysis and/ or cost projections before implementing any of the options. 1. Close the existing City plan to new members and establish a defined contribution plan for future hires. Under this option, the City' s existing defined benefit plan would remain in effect for current members and would continue to be funded until the last benefit is paid. However, the existing plan would be closed to new members, and all employees hired in the future would participate in a new defined contribution plan. What is a defined contribution plan? A defined contribution or " DC" plan would provide an individual account for each participant. The DC plan benefit is not based on a formula, but on the amounts contributed by the employer and employee plus ( or minus) investment gains and losses. Governmental defined contribution plans are similar in many respects to the 401 (k) plans that have been adopted by many private sector companies. Under a DC plan, employer contribution rates are typically set at a specified level, and employees usually can contribute an amount up to the maximum allowed by law. A DC plan can be funded entirely by employer contributions, or by a combination of employer and employee contributions. Employee contributions can be made in pre- tax dollars. The trustee of a DC plan may be responsible for investing plan assets, or the plan may permit participants to direct their own investments. Investment returns are credited to participant accounts, and participants bear the risk of investment loss. Amounts that are attributable to employee contributions are fully vested at all times, while the directly right to funds attributable to employer contributions is governed by the plan' s vesting schedule. Generally, if a participant leaves before being fully vested, the unvested amount is forfeited and reallocated to the remaining participants' accounts. 12 Page 34 Defined Benefit Plan Contrasted A defined benefit (" DB") plan, like the City' s current plan, provides a specified pension benefit upon an employee' s retirement, typically based on a formula that includes some combination of compensation, years of service, and a benefit multiplier. The employer is to contribute the amount necessary to ensure that the promised benefits will required be available to employees when they retire, and that the plan is funded on a sound actuarial basis. Contributions to a DB plan are determined using actuarial assumptions and cost methods based on mortality, turnover, payroll growth, inflation, investment return, and other factors, and are calculated to spread the funding of promised benefits over the work- life of the participants. The employer may have to pay additional amounts into a defined benefit plan if actual experience does not meet the actuarial assumptions of the plan. This is exactly what has occurred with the Ft. Walton Beach retirement plan over the past several years, resulting in significant increases in plan costs and contributions. Under a DC plan, employer contributions are usually fixed and established by ordinance. DC plans typically cost less than DB plans because targeted benefit levels are lower in most DC plans than DB plans. The same targeted benefits cost more in a DC plan because DC plan participants typically vest earlier and are able to receive greater benefits before retirement than members of a DB plan. In a DB plan, are promised and paid for rest of the member' s life after benefits retirement. In a DC plan, a participant may outlive the benefits. DB plan benefits are not affected by the economic environment at or near the time of retirement. DC plan benefits may be greatly affected by the economic environment at or near the time of retirement. In a DB plan the benefit is spelled out. In a DC plan, only the employer' s contribution is spelled out. In a DC plan, the risk of investment and demographic gain or loss is assumed by the participants. In a DB plan, the investment and demographic risk falls on the Although DB plans provide a secure benefit and DC plans do not, employer. many employees prefer DC plans because even though they bear the risk of loss, they receive the benefit of any gain on investments. Depending on market performance, obtain lesser benefit under a DC plan than a DB plan. DC employees may a greater or plans usually have shorter periods than DB plans ( for example, under the vesting Florida Retirement System investment plan, participants become fully vested after one year of service). Some of the advantages and disadvantages of a DC plan are summarized below. Advantages of a DC Plan Appeal to younger, mobile employees; Predictable employer costs; Reduced administrative costs; 13 Page 35  Ease of communicating benefits to employees; Flexible distribution options, including in- service withdrawals and loans, and lump- sum payments Individual accounts are usually available for transfer from one employer to another, or may be rolled over into the participant's IRA; No need for actuarial services; Plan may provide for self- directed investments by participants. Disadvantages of a DC Plan Full investment risk is on participants; Funds can be available prior to retirement, thus participants are less likely to allow their account balances to grow to their full potential to fund retirement;' Accounts have no cost of living adjustments, therefore no inflation protection. There is usually no recognition of past service of employees prior to the time of plan implementation. 2. Close the existing City retirement plan to new members and join the Florida Retirement System ( FRS). Under this option, current employees would be able to remain in the existing City plan or they could elect to become a member of FRS. Future hires would be required to participate in FRS. More than 600, 000 state and local government employees and 800 agencies participate in the Florida Retirement System. FRS was established and may be amended only by the state legislature. FRS contains two retirement options: a defined benefit plan and a defined contribution plan. Employees can elect to participate in one plan or the other. The FRS Pension Plan is a defined benefit plan administered under part I of chapter 121, F. S. The benefits to be paid at retirement are guaranteed by the plan, and are based on a formula contained in the plan. The overwhelming majority of FRS members are in this plan. The vesting period is six years, and the current employer contribution for general employees is 9. 85%. The FRS Investment Plan ~ this is a defined contribution plan in which new members may elect to participate instead of the FRS defined benefit plan. Members may direct the investment of their plan account in a wide variety of investment options. The FRS investment plan has a one- year vesting period with current employer contributions of 9%. FRS would clearly be a less costly alternative to the City' s current defined benefit plan in terms of administrative expenses and contribution rates. The current FRS employer contribution rate ( 9. 85%) is about 40% less than what the City is now contributing to the City retirement fund. Moreover, FRS does not require any employee contributions. 14 Page 36 However, the benefits provided by FRS are less generous than those offered by the City' s current plan. 3. existing City retirement plan, and join FRS or establish a Terminate the defined contribution plan for all employees. Under this option, the current City plan would terminate on a date certain. All current City employees would become members of FRS or a new DC plan on the day after the City plan terminates. All future City employees would join FRS or the DC plan on the day they are hired. All members of the City plan would become fully vested in their accrued benefit under the City plan as of the date of termination, regardless of service, subject to the availability of assets. The accrued benefit could be paid out to members in a lump sum, rolled over to an IRA or other qualified plan, or paid out over a period of years, as determined the Board of Trustees ( City Council). by An alternate trust could be established for the purpose of paying out members' accrued benefits over time, or annuities could be purchased. The assets of the plan would be apportioned in accordance with section 17- 20(3) of the plan. Members of the City plan would not be eligible for past service credit under FRS for their City service, unless they waived their right to receive benefits from the City plan. 4. Close the existing City retirement plan to new members, and create a new defined benefit plan with benefits based on a target contribution rate. Under this option, the City would establish a new DB plan. The new plan would be based on a Plan benefits would be target rate for employer and employee contributions. determined based on the target contribution rates. Current employees could remain in the existing plan, or transfer to the new plan. The benefits in the existing plan would not change. However, employees hired in the future would be required to participate in the new defined benefit plan, which would operate independently from the existing plan. Because of the target contribution rates in the new the cost of the plan would be lower than the current plan. However, under plan, Florida law, the City would still be required to fund the plan such that it remains actuarially sound. Since there is no way to predict future actuarial experience or benefit increases, contribution levels may increase over time. 5. existing plan benefits for current members; adjust benefits for Freeze future hires. Under this option, current members would remain in the existing plan and would receive benefits as currently provided in the plan. Newly hired employees would also become members of the existing plan; but would have different benefits. The City would be able to plan