Mid-Atlantic Plan Sponsors (MAPS) Trustee Educational Conference June 9, 2011

1. Mid-Atlantic Plan Sponsors(MAPS)Trustee Educational ConferenceJune 9, 2011 What Type of Retirement Plan Do You Want & Can You Afford It? David Boomershine – Senior Actuary

2. Agenda • Background – Retirement Plans • Types of Retirement Plans • Retirement Program Objectives • Cost Volatility Issues • Alternative Plan Designs • Retirement Benefit Comparisons • Cost Comparisons • Plan Comparison Summary • Current Public Sector Plan Changes – Questions? • DB to DC Plan Transition Issues • Other Current Issues

3. Background • Competitive • Attract employees • Tax break • Reward employees/employee appreciation • So employees can retire • Contribute to society Employers sponsor retirement plans – why?:

4. Background Ideal employer sponsored retirement program: • Defined Benefit Plan (DB) – Base • Defined Contribution Plan (DC) – Supplemental Combined program provides blend of security, flexibility for employees

5. Types of Retirement Plans • Defined Benefit (DB) Plans • Lifetime benefit based on formula • Career average pay plan (ex. 1.0% of pay for each year of service) • Traditional final average pay plan – recent significant issues (ex. 1.5% of 5-year final average pay times years of service) • Benefit accruals are “back loaded” • Public Sector – typically includes employee contributions, on a pre-tax basis • Employer has investment risk

6. Types of Retirement Plans • Defined Contribution (DC) Plans • IRC Section 457 Plan • Employee and/or employer contributions • Account balances grow with contributions and investment income (gains and losses) • Employee has investment risk • Typical lump sum payout of account balance

7. Types of Retirement Plans • Hybrid Plans – Cash Balance (CB) Plans • Hypothetical account balance grows with contributions and interest credits • Conversion to lifetime benefit at retirement • Lump sum can be paid out • DB plan with DC features • Benefit earned more evenly over career • Employer has investment risk Note: in Public Sector, Hybrid Plan can also mean a combination of a DB Plan and a DC Plan

8. Types of Retirement Plans • General Plan Comparisons

9. Retirement Program Objectives • Retirement Program Objectives Summary • Primary Objectives • Competitive benefits • Affordable benefits – within financial structure/budget • Minimize cost and funding volatility • Maintaining current benefit levels, as much as possible, for current employees

10. Retirement Program Review • Secondary Objectives • Creation of cost awareness and appreciation among employees • Attraction and retention of qualified personnel – especially certain skilled employees • Attaining maximum tax efficiency in delivering benefits • Encouraging benefit responsibility – employee sharing the cost of retirement financial security • Developing more choice – employee benefit control

11. Cost Volatility Issues – Pension Plans • Cost Volatility Issues • Concern about DB plan funding and accounting volatility due to fluctuations in: • Valuation interest rates; i.e. the interest rates used to value plan liabilities and costs to determine required cash contributions • Asset returns (i.e. Market Value of Assets); Plan costs and unfunded liabilities are directly affected as investment returns and asset values go up and down

12. Alternative Plan Designs-Case Study Sample Plans: • DB Plan: Benefit Formula = 1.5% times final average pay times service, up to 35 years • DC Plan: Employer contribution formula = 7% of pay plus 50% match of employee’s 1st 6% of pay savings • CB Plan: Employer contribution credit = 10% of pay for each year of service

13. Typical Benefit Accrual Patterns DB Accrued Benefit CB DC 35 45 55 65 Age (Hired at age 35)

14. Retirement Benefit Comparisons • Sample employees representing a cross-section of active plan population

15. Retirement Benefit Comparisons • Replacement Ratios: % of final pay replaced with lifetime pension benefits • Actuarial Assumptions: • Mortality: RP2000 Table • Interest: 6%

16. Cost Comparisons As a % of payroll: • DB Plan 8.5% • DC Plan 9.0% • CB Plan 8.0%

17. Plan Comparison Summary DB Plans are the most cost efficient method to deliver retirement benefits - Retirement Benefits

18. Plan Comparison Summary Why are DB plans more cost efficient? • Reward long service – back loading due to final average pay • Forfeitures remain in plan – more with DB plans • Younger terminations – similar to forfeitures

19. Plan Comparison Summary Conclusions of Case Study: • For similar long-term plan costs, traditional DB plans provide about 130% of lifetime benefits provided by DC plans • Other studies claim traditional DB plans provide up to 150% more in benefits for the same cost vs. DC plans • Career average DB plans provide about 20% more in benefits for the same cost vs. DC plans

20. Current Public Sector Plan Changes Current Questions • Not enough cost reduction? • Cost/liability volatility concerns remain; especially vs. Private Sector? • Future of economy? • Changing workforce? • More changes coming?

21. Transition Issues If converting from DB plan to DC plan, the following issues must be addressed: • Preservation of Accrued Benefits • Projected Benefits? • DC Plan – better replacement of DB benefit • Not match only • Not flat employer contribution • Service based employer contribution schedule • Example: • Count past service • Add Match? • Employee communications/education • Announcements/other print materials • Benefit comparison statements • Employee meetings

22. Other Current Issues • Comparison vs. Private Sector Plans • Taxpayer concerns • DB plans • OPEB plans • Union reactions • Capping employer contribution commitment • Valuation Discount Rate Basis/Reduction? • COLA’s – DC plans

23. Questions?