Fort Walton Beach Council agenda — 12-08-2010 - regular — reading text

66- In a DB plan, benefits are promised and paid for rest of the member's life after retirement. In a DC plan; a participant may outlive the plan 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. The dramatic market declines that have occurred in the past 18 months provide a vivid illustration of how DC retirement plans can be affected by the economic environment. In a DB plan the benefit is spelled out. In a DC plan, only the employer's contribution is spelled In a DC plan, the risk of investment and demographic gain or loss is out. assumed by the participants. In a DB plan, the investment and demographic risk falls on the employer. Although DB plans provide a secure benefit and DC plan do not, many employees prefer DC plan because even though they bear the risk of loss, they receive the benefit of any gain on investments. In addition, many DC plans have shorter vesting periods (for example, the Florida Retirement System DC plan has a one year vesting period, compared with 6 years for the FRS DB plan). This means it is easier for employees to take their DC retirement account with them when they leave an employer, by rolling it into an IRA or another employer's DC plan. 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; 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 rolled over into the participant's IRA; A No need for actuarial services; and Plan may provide for self -directed investments by participants. Disadvantages of a DC Plan Full investment risk is on participants; Y Participants assume full risk of outliving their DC plan benetits;. 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; and There is usually no recognition of past service of employees prior to the time of plan implementation. 67- Cost of a DC Plan The cost of a DC to the City is based on how much the City decides to contribute to the plan. Plan administration is often provided by a third party administrator, at minimal or no cost to the City. The cost of plan administration is often paid by employees through fees to the third party administrator. No actuarial and little if any legal services are required in connection with a DC plan. The employer and employee contribution rates of several Florida cities that have established DC plans are shown in Appendix A. Examples of DC Plans recently established by Florida Cities A. City of Jacksonville —established in 2008, the City's defined contribution plan is optional for all current and future employees. Each employee may individually elect to join the defined benefit plan or the defined contribution plan. Under the DC plan, employees are required to contribute the same amount ( 7. 7% of pay) that they would have to contribute if they participated in the DB plan. The City contributes an equal amount ( 7. 7 %) to the! DC plan on behalf of each employee. Employees can direct their own investments in the DC plan. Employees become 25% vested in the DC plan after 2 years, 50% after 8 years, 75% after 4 years and 100% after 5 years. B. City of Ft. Lauderdale — the City of Ft. Lauderdale implemented a defined contribution plan for general employees in 2007. All general employees hired after the effective date of the IDC plan become members of the DC plan. Employees hired prior to that date could continue to participate in the DB plan, or join the DC plan. The City contributes 9% of pay to the DC plan on behalf of each member; there are no employee contributions, One Approach: Close the existing City Retirement Plan to new members and establish a defined contribution plan for future hires. Under this approach, the City's existing defined benefit plan would be closed to new members and remain in operation for current members. The City would be required to continue funding the existing plan on a sound actuarial basis, until the last benefit is paid. All general employees hired in the future would participate in a new defined contribution plan. This is the approach that was adopted by the City of Ft. Lauderdale. 68- Projected Costs Under Several Defined Contribution Plan Scenarios Several different DC plan options, and projected total pension costs ( for the closed DB plan plus the new DC plan) are outlined below. 1. 2. 5% employee contribution / 5% City contribution — under this approach, members would be required to contribute 2. 5% to the DC plan, and the City would contribute 5 %. The combined normal cost of the DB and DC plan over 30 years is projected below: Year 1 12. 7% Year 5 11. 2% Year 10 9. 3% Year 15 7. 6% Year 20 6. 6% Year 25 5. 7% Year 30 5. 0% Note: amortization payments ( currently 2. 15 %) to pay off the unfunded actuarial accrued liability in the DB plan would be in addition to the cost shown above. 2. 4% employee contribution / 8% City contribution — under this approach, members would be required to contribute 4% to the DC plan, and the City would contribute 8 %. The combined normal cost of the DB and DC plan over 30 years is projected below: Year 1 12. 7% Year 5 11. 8% Year 10 10. 6% Year 15 9. 6% Year 20 9. 0% Year 25 8. 4% Year 30 8. 0% Note: amortization payments ( currently 2. 15 %) to pay off the unfunded actuarial accrued liability in the DB plan would be in addition to the cost shown above. 69- 3. 4% employe: contribution / 4% City contribution; plus optional employee contribution of up to an additional 4 %, with a City dollar for dollar match up to 4% under this approach, members would be required to contribute 4% to the DC plan, and the City would contribute 4 %. Members would be allowed but not required to contribute an additional 4 %, and - the City would match the member's additional contribution dollar for dollar, up to. 4 %. This approach might encourage members of the existing city DB plan to join the DC plan. The combined normal cost 'of the DB and DC plan under this scenario over 30 years is projected below: Year 1 12. 7% Year 5 11. 4% Year 10 9. 7% Year 15 8. 3% Year 20 7. 4% Year 25 6. 6% Year 30 6. 0% Note: amortization payments (currently 2. 15 %) to pay off the unfunded actuarial accrued liability in the DB plan would be in addition to the cost. shown above. 4. 5% employee contribution 15% City contribution; plus optional employee contribution of up to an additional 2. 5% — under this approach, members would be required to contribute 5% to the DC plan, and the City would also contribute 5 %. The combined normal cost of the DB and DC plan over 30 years is projected below: Year 1 12. 7% Year 5 11. 5% Year 10 9. 8% Year 15 8. 4% Year 20 7. 6% Year 25 6. 9% Year 30 6. 3% Note: amortization payments ( currently 2. 15 %) to pay off the unfunded actuarial accrued liability in this DB plan would be in addition to the cost shown above. 70-  Conclusion and Action Plan The City of Fort Walton Beach currently provides a defined benefit ( DB) pension plan for its general employees. Under the current City pension plan, benefits are based on a formula that includes a member's years of service, final average earnings and a benefit multiplier. The City pension plan also includes disability benefits, death benefits, and survivor benefit options. The City is required by law to fund the existing DB plan on a " sound actuarial basis." Employee contributions are fixed at 5% of compensation. Each year the City must pay the amount necessary to fund the plan, as determined by the actuary, in addition to the amount contributed by employees. The City bears the risk of investment losses and any other actuarial losses that result when actual experience does not meet the actuarial assumptions of the plan ( mortality, turnover, payroll growth, inflation, and other factors). The City currently contributes $ 1. 26 million annually to the general retirement fund ( 14. 87% of payroll). The required City contribution will likely increase significantly in the next few years as a result of investment losses that occurred in FY 2007 -08, as well as additional losses that have occurred in the current fiscal year. These losses will be recognized over the next 5 years. The City would achieve considerable cost savings by establishing a defined contribution DC) plan for future employees. General hired after the DC plan is employees established would be required to participate in the DC plan. Employees who now participate in the DB plan would be able to join the new DC plan, or remain in the DB plan for as long as they are employed by the City. The cost of the DC plan, and the resulting cost savings to the City, would be determined by how much the City contributes to the DC plan, and how many DB plan members elect to join the DC plan. There are a number of ways the City could establish employee and City contribution levels to the DC plan. Four possible scenarios are outlined below: 1. 2. 5% employee contribution / 5% City contribution. 2. 4% employee contribution / 8% City contribution. 3. 4% employee contribution / 4% City contribution; plus an optional additional employee contribution of up to 4 %, and a City match of the additional employee contribution [ total possible employee contribution = 8 %; total possible City contribution = 8 %]. 4. 5% employee contribution / 5% City contribution; plus optional employee contribution of up to an additional 2. 5 %. Action Plan 1. Once the decision is made to