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Retirement Plan Project Update

Retirement Plan Project Update. Board of Curators March 21, 2011. What is the retirement plan project?. Critical components Continue to offer the current UM Defined Benefit (DB) Plan for current participants while maintaining its financial stability

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Retirement Plan Project Update

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  1. Retirement Plan Project Update Board of Curators March 21, 2011

  2. What is the retirement plan project? Critical components • Continue to offer the current UM Defined Benefit (DB) Plan for current participants while maintaining its financial stability • Determine guiding principles and objectives for retirement program • Evaluate current retirement plans • Understand long-term costs and risks • Assess and respond to employee perceptions and issues • Develop and consider alternate approaches to meet objectives and align with guiding principles a a

  3. Project Objectives – Why are we doing this? • Mitigation of long-term risks to the institution; provide a sustainable total compensation package • Increase benefit flexibility to meet the evolving needs of the University as well as current and future staff and faculty b b

  4. Why the UM Defined Benefit plan has been successful • UM plan encourages and rewards long service • UM plan is significantly different from peers – and lower in average cost • Operates as a ‘hybrid’ plan --- minimum benefit feature prior to retirement eligibility • UM plan is structured to minimize volatility, and high employer expense: • Investment gains and losses are ‘spread’ over 5 years • Few expensive plan features (e.g., limited early retirement, no guaranteed COLAs, 5-year average final salary) • Recent creation and funding of stabilization fund • Fully funded (on an actuarial basis) • Employee contributions – began 2009 c c

  5. Why there is concern about this type of plan for the future • Historical funding assumptions may not be met: • 8% (long-term)investment return – expected but very volatile • Changing employee needs/values • Retiree expectations/pressure for COLA increases • Instability of state revenue support • Changes in Governmental Accounting Standards (for unfunded market liability) d d

  6. UM Defined Benefit Plan contributions Actual Projected % of payroll 11.56% 11.73% 11.54% 11.41% 9.86% e

  7. Committee Outcomes • Seven page summary and recommendation • Committee consensus recommendation • Fourteen page Q & A reviewing committee’s extensive research and conclusions f

  8. Advisory Committee Findings • No inherent harm to UM DB plan if closed to new participants • Retirement income adequacy is the most important objective • There are ways to mitigate investment and other risk for employees in DC-type plans • When competitive, the retirement plan is not a determining factor in attraction or retention of employees h g

  9. Retirement Plan Statistics • Over 60% of employees do NOT reach 5-year vesting • Turnover is much higher for hourly staff and lower for salary staff and tenured faculty • Only 16% of employees reach a full career UM retirement i h

  10. Advisory Committee Recommendations • Board and administration should document commitment to current UM DB plan, regardless of future decisions: • Provide full funding of annual required contribution • Payoff of unfunded liability over time • Continue the stabilization fund with primary purpose of minimizing employee contributions to DB plan j i

  11. Advisory Committee Recommendations (continued) • Strive to maintain low mandatory employee contributions, with consistency between the current plan and any future plans • Develop and support a strategic employee communications plan to foster understanding and appreciation of benefits • Future plans must include options to reduce employee investment and other retirement risk (e.g., auto-enrollment, default to highest contribution levels, etc) k j

  12. What makes the final recommendation so difficult? • Cost, and unknown future • Initiating change is difficult when that decision impacts future generations of UM employees • Volumes of complex information without obvious solution • Philosophical challenges (competing and conflicting retirement plan objectives) l k

  13. Competing and Conflicting Objectives m l

  14. Competing and Conflicting Objectives (continued) n m

  15. Consensus Recommendation If, after thorough and careful study of the viability of the current UM DB plan (both short term and long term), the Board determines it is not in the University’s interest to continue to bear the financial risks implicit in the current UM DB plan, the preferred alternative plan design is a new retirement plan, for new employees only, that provides a ‘combination’ of defined benefit and defined contribution elements, along with other mechanisms for reducing risk. o n

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