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Retirement Plan Advantages A Comparison of DB and DC Plans

Moderator: Kurt Weber, State of New Mexico Panelists: Jamie Ohl, The Hartford Bill Heydt, Nationwide Retirement Solutions. Retirement Plan Advantages A Comparison of DB and DC Plans. Retirement Plan Advantages A Comparison of DB and DC Plans. Jamie Ohl Vice President, The Hartford.

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Retirement Plan Advantages A Comparison of DB and DC Plans

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  1. Moderator: Kurt Weber, State of New Mexico Panelists: Jamie Ohl, The Hartford Bill Heydt, Nationwide Retirement Solutions Retirement Plan AdvantagesA Comparison of DB and DC Plans

  2. Retirement Plan AdvantagesA Comparison of DB and DC Plans Jamie Ohl Vice President, The Hartford

  3. Defined Benefit More income for career employees Easily understood benefit Guaranteed lifetime income Defined Contribution More income for non-career employees Easily determined contribution Guaranteed account balance Retirement Plan Advantages

  4. Considerations 1. Living longer than expected in retirement Longevity data presented does not reflect mortality from birth statistics available from U.S. Census Bureau. NOT FOR USE WITH THE PUBLIC

  5. Considerations 2. Rate of withdrawal Hypothetical initial value of $500,000 invested 12/31/ 1972. Portfolio: 50% large-company stocks, 50% intermediate-term bonds. Assumes reinvestment of income and no transaction costs or taxes. 11 Years 10% 13 Years 9% 15 Years 8% Withdrawal Rate 18 Years 7% 21 Years 6% 27 Years 5% 33 Years 4% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS Data source: Ned Davis Research, 1/06. Stocks—Standard & Poor’s 500®, The S&P 500 Index is an unmanaged list of 500 widely held U.S. common stocks frequently used a measure of U.S. stock market performance; Intermediate-term Bonds— Lehman Brothers Aggregate Bond Index which is an unmanaged group of securities and is considered to be representative of the bond market in general. The above indices are unmanaged and unavailable for direct investment. NOT FOR USE WITH THE PUBLIC

  6. Considerations : hypothetical 5.1% average annual return Data Source: Hartford Internal Research

  7. Defined Benefit Automatic inflation protection during career May provide inflation protection during retirement Internal rate of return on investments is higher Defined Contribution Account balances are portable Cost of administration is generally less than for a defined benefit plan Opportunity for higher benefits Retirement Plan Advantages

  8. Considerations 3. Inflation 1940s 1950s 1970s 1960s NOT FOR USE WITH THE PUBLIC

  9. Considerations 4. Lower average returns on DC assets…

  10. Considerations

  11. Considerations 5. Traditional sources of retirement income may not be available Social Security (AP)WASHINGTON The trust fund for Social Security will be depleted in 2040, a year before expected, and Medicare will exhaust its trust fund reserves just 12 years from now, . . . the country [is facing] a "looming fiscal crisis as the baby boom generation moves into retirement." trustees for the programs said Monday. Treasury Secretary John Snow Source: cbs3.com,Social Security, Medicare Trust Funds Sink, May 1, 2006 NOT FOR USE WITH THE PUBLIC

  12. Retirement Plan DisadvantagesA Comparison of DB and DC Plans Bill Heydt Vice President Nationwide Retirement Solutions

  13. Defined Benefit Employer assumes all risk Actuarial Investment Market Volatility Political pressure to lower costs Defined Contribution Employer may contribute to two plans: DB for current employees and DC for new hires Negotiation of labor agreements may result in higher wages Separate funding of disability benefits Employer PerspectiveDisadvantages - Costs

  14. Defined Benefit Benefit formulas set by state statute and are difficult to change Complex communication and administration Employees retire early, as soon as benefits max out Defined Contribution Employee benefits are not guaranteed Insufficient asset accumulation may result in older workforce Investment education and guidance must be provided Employer PerspectiveDisadvantages – Other Considerations

  15. Defined Benefit Employer responsible for all investment decisions Limited choice for distributions, with little or no portability options Defined Contribution Employees bear full investment risk and are responsible for all decisions Current investment decisions are generally too conservative Employee PerspectiveDisadvantages - Control

  16. Defined Benefit Short-term employees receive little value Value of benefit not always understood Rules can be complicated and varied by employment status, hire date Defined Contribution If accumulations not sufficient, retirement date may be delayed Retirement income is not guaranteed Investment decisions can be confusing Employee PerspectiveDisadvantages – Other Considerations

  17. Questions? Experiences? Examples? Thank You!

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