Bill 394 – 32 Testimony

1. Bill 394 – 32 Testimony September 23, 2014 Maggie Ralbovsky, CFA, Managing Director Wilshire Associates Incorporated

2. A DB Plan as a single investment entity, is by design a perpetuity. This translates into a very long term investment horizon and a high tolerance to investment risk, and therefore, a higher expected investment return is expected, compared to an individual constrained by a limited lifespan. • Long term consistent risk taking is the key to generate investment returns • A National Study conducted by Towers Watson found that on average, DB Plans generate annual returns about 2.5% higher than DC plan accounts • A 2.5% per year difference is equal to a wealth difference of roughly 2 times over a 30 year period. • This means that in the long run, a DB Plan is a cheaper way to fund the same amount of retirement income than a DC plan. A DB Plan is generally paying less fees than a DC Plan, because of the economy of scale and access to institutional separate account managers. • A national survey conducted by Deloitte showed median “all-in” fees paid by DC Plans are 0.78%. • A national survey conducted by Greenwich Associates showed that the median “all-in” fees paid by DB plans are 0.58%. • The 0.2% annual fee savings contribute to the better annual returns. DB Plan is Cheaper than DC Plan, All Things Being Equal

3. Plan Average 60% National average asset allocation reveals that offering “Options” to the participants does NOT equal offering solutions. Very few participants take appropriate levels of risk. DC Plan Experience Challenges to act as your own Chief Investment officer: Investment Knowledge Confusing options Time Constraints Dynamic Markets Human Lifecycle is finite Negative Inertia Source: Tarbox Group Pilot Program

4. In the late 1990s, an average pension plan is 100% or over 100% funded. This encouraged many initiatives to increase benefits, without considering the fact that market goes through cycles. DB plans started to become unaffordable, after these benefit increases and market crisis hit 3 times in the past 15 years. A disciplined funding practice and proportional benefits are key to keep DB plans affordable. When DB Plan Becomes Unaffordable Source: Wilshire Annual Public Funding Survey

5. Pay as You Go System • No trust fund reserved • Next generation supports previous generation Reform is inevitable • By 2033, it is expected that the Social Security tax collection will not be sufficient to cover the benefits due to negative demographic trends. • Push back retirement age? • Raising social security taxes • Other reform? Social Security – Facing Formidable Demographic Challenges