Federal Update

1. Federal Update 16th Annual Louisiana Public Retirement Seminar by Cynthia L. Moore, Attorney at Law and Washington Counsel, National Council on Teacher Retirement September 15, 2004

2. Topics Terrorism Investments Defined Benefit versus Defined Contribution Plans (DB/DC Debate) Other Issues: See NCTR Report

3. Focus on public fund investments in companies with activities in 7 countries (Cuba, Iran, Iraq, Libya, North Korea, Sudan, and Syria) Report by Center for Security Policy (CSP) Terrorism Investments

4. Controversial Report “The Terrorism Investments of the 50 States” by CSP Finding: 87 of nation’s 100 largest public pension funds invested from 15 to 23% of total portfolios in companies with business in terrorist-sponsoring countries

5. CSP Per website, “a non-profit, non-partisan organization committed to the time-tested philosophy of promoting international peace through American strength”

6. Problems with Report Does not differentiate between companies doing business with these countries and companies actually supporting terrorist activities Unable to trace revenues generated by publicly traded companies to sponsorship of terrorism

7. Problems with Report, continued Singles out public plans for criticism Does not attack institutional and private investors

8. NASRA, NCTR, NCPERS, and Others Critical of Report In their letter to Frank Gaffney, CSP President, they say: Report was based on faulty premises, contained inflammatory title, provided distorted and misleading picture of states and their pension funds

9. CSP and Conflict Securities Advisory Group (CSAG) CSAG is marketing Global Security Risk Monitor -- a software product offered on a subscription basis for $12,500 per year CSP and CSAG appear to share office CSP and CSAG do share a top person -- Roger Robinson, Senior Resident Fellow at CSG, and President of CSAG

10. Senator Frank Lautenberg (D-NJ) Involved He wrote to some public fund executives asking them for: A list and risk assessment of portfolio investments with ties to or activities with U.S. Department of State-designated terrorist sponsoring countries Information on whether asset managers are assessing such business relationships A list of other investment restrictions

11. Bottom Line Federal government decides whether U.S. companies can do business in other countries based on national security concerns

12. Joint Letter (mentioned above) NCTR and NASRA joined Economic Terrorism Commission in 2001 Commission has been working to set up meeting with the Office of Global Security Risk (OGSR) in the Securities and Exchange Commission (SEC) Response by Public Fund Groups

13. OGSR will focus on disclosure issues, particularly regarding the disclosure of operations of foreign and U.S. companies on U.S. exchanges that operate in terrorist-sponsoring countries OGSR

14. DB/DC Debate Definitions Features Issues

15. What is a DB plan? Benefit based on formula: Years of Service times Final Average Salary times Multiplier equals Annual Pension Benefit Level of benefit at retirement is known Benefits are guaranteed

16. How do DB plans operate? Funded by employer contributions, employee contributions, and investment income Overseen by board of trustees, who are subject to strict fiduciary laws Assets managed by professionals Generally large entities, which can operate at a low cost

17. What is a DC plan? Individual account Level of benefit at retirement unknown Benefits are not guaranteed

18. How do DC plans operate? Funded by employer contributions, employee contributions, and investment income Individual makes investment decisions usually from a range of options Because each account separate, cannot benefit from economies of scale, thus more expensive than DB plans

19. Features of DB Plans Beneficial to U.S. Economy Beneficial to Employers (State and Local Governments and Taxpayers) Beneficial to Employees

20. Beneficial to U.S. Economy Fueling the economy: investment of DB plan assets and the flow of benefit payments to retirees creates a continuous, predictable, and growing source of economic stimulus

21. Beneficial to U.S. Economy Boosting economic growth: DB plans are large pools of assets, the investment of which adds billions of dollars each year to U.S. economy through higher returns than what would be earned if assets in DC plans

22. Beneficial to U.S. Economy Creating needed capital: DB plans offer a major source of entrepreneurial capital that would not be otherwise widely available

23. Beneficial to Employers Low administrative costs Reserve funding reduces costs High performance workforce Flexible design

24. Secure retirement benefits Comprehensive and flexible design Beneficial to Employees

25. More than just retirement benefits Disability Protection Early Retirement Benefits Early Retirement Incentive Programs Death Benefits Benefit Improvements COLAs Portability through Purchases of Service Credit Other Features of DB Plans: Comprehensive and Flexible Design

26. Private sector is moving to DC plans Portability Participant control Participant preference Arguments of DC Plan Proponents

27. Private sector is moving to DC plans? Not necessarily True for small private sector businesses of between 2 and 9 employees False for large companies -- stable number of DB plans at large companies between 1997 and 2002 per U.S. Pension Benefit Guaranty Corporation

28. Private sector is moving to DC plans? State and local governments more like large companies in outlook and needs than small private sector entities

29. Only DC plans can provide portability? False DB plans offer: Purchases of service credit Indexing future retirement benefits of inactive retirement system members Enhancing benefits of terminating members

30. Only DC plans can provide portability? Drawback to portability -- Leakage Two-thirds of individuals in DC plans cashed out their assets when they changed to a new employer per Employee Benefits Research Institute (EBRI) 2002

31. Does participant control translate into more retirement security? No -- Individual investors have difficulty beating market Study by Nebraska Public Employees’ Retirement Systems (NPERS) of returns between 1983 and 1999 NPERS operates both DB and DC plans

32. Does participant control translate into more retirement security? Results of study: DB plans -- 11% return per year DC plan participants -- 6% return per year

33. Does participant control translate into more retirement security? Median cost of a DC plan is approximately 1.4% Median cost of a DB plan is approximately 0.30% Higher DC cost reduces assets available for benefits

34. Do employees want DC plans? Few employees who had the chance to transfer from DB to DC plan in Florida and Ohio have done so Impetus for DC plans: vendors who earn higher fees from DC plans

35. Case Study Wall Street Journal 8/16/02 Two Cousins in Illinois -- Drew who worked for Illinois Department of Revenue and Michael who worked in high tech sector

36. Drew started with a $18,000 a year salary -- promoted and retired with a salary of $72,000 Michael had a 401(k) plan with a company that laid him off in 2002 and the value of his retirement savings sank by $30,000 Case Study

37. Drew took an early retirement at age 51 and his pension approximated $54,000 If Michael were to retired now as Drew has done, he could take only $28,000 per year to be sure that he didn’t outlive his money Case Study

38. Comparison of DB and DC Plans

39. See attached NCTR Federal Update Summary of Other Issues