Developing a Comprehensive Benefit Strategy

Transcription

1 Developing a Comprehensive Benefit Strategy Tuesday, June 2, :00 3: CPEs Moderator: Speakers: Casey Srader, City of Plano, TX Rich Harris, Denver Employees Re=rement Plan Glenn Sherman, ICMA- RC Rick Johnson, Segal Co.

2 COMPREHENSIVE BENEFITS STRATEGY How it all fits together Rich Harris Denver Employees Retirement Plan

3 Retirement Income Social Security Personal Savings and Investments We all know about these three legs of the stool. Typical State/ Local Gov t Pension But are employees taking full advantage of what s being offered? 2

4 The following table shows one of the most important calculations in almost every American s life: AIME Applicable Benefit Percentage Applicable Benefit Lowest Tier Middle Tier Highest Tier Total Monthly Maximum $826 90% $743 $4,154 32% $1,329 $4,086 15% $613 $9,066 30% $2,686 Annual Maximum $108,792 30% $32,227 Do you see how it is biased toward low earnings? But how many people really understand the significance of that? Social Security How it Works 3

5 100% 80% 60% 40% 20% 0% Annual Social Security Benefits as a Percentage of Increasing Levels of Average Indexed Earnings 90% 42% 30% How Social Security Works 4

6 Annual Social Security Benefits for Varying Levels of Earnings $35,000 $30,000 $25,000 $20,000 $15,000 $8,640 $10,000 $5,000 $0 $24,565 $32,108 End of Career Annual Earnings How Social Security Works 5

7 Analysis of Strength of Stool Leg Social Security Employee Contributions? Employer Contributions? Required Participation Party Responsible for Paying Benefits Benefit Maximization Strategy Benefits Payments Term Survivor Benefits Available? Inflation Protected? Yes Yes Yes US Gov t Paying FICA taxes for 35 years Lifetime Yes Yes Strength of Stool Leg Strongest 6

8 Example of Typical Public Sector DB 1.5% multiplied by number of years of credited service times the average monthly salary (based on the highest 36 consecutive months of salary) Example: The member is age 65, has 20 years of credited service, has an end of career annual salary of approximately $60,000 and an average monthly salary of $5, % X 20 Years = 30% X $5,000 = $1,500/month, or $18,000 per year This calculation represents a Normal Retirement benefit How is it calculated? 7

9 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 $4,500 Typical State/Local Gov t Retirement Benefits Depending on Years of Service Assuming High Average Annual Salary = $60,000 at age 65 $9,000 $13,500 $18,000 $22,500 $27,000 $31, Years of Service Typical DB Annual Benefit How Typical DB benefit is Calculated 8

10 Combined Social Security and Typical DB Benefit at Varying Levels of Public Sector Service $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 Assuming High Average Annual Salary = $60,000 at age 65 $4.5K $9K $13.5K $18K $27.5K $27K $31.5K $20K $20K $20K $20K $20K $20K $20K Years of Service Social Security Benefit at Age 66 Typical DB Benefit Social Security benefits based on 35 years of employment and end-of-career pay of $60,000 Combining Both Life Annuities 9

11 Combined Income Replacement at Varying Levels of State/Local Gov t Service 100% 80% 60% 40% 20% 0% Assuming High Average Annual Salary = $60,000 at age 65 8% 15% 23% 30% 38% 45% 53% 33% 33% 33% 33% 33% 33% 33% Years of DERP Service Social Security Benefit at Age 66 Typical DB Benefit Social Security benefits based on 35 years of employment and end-of-career pay of $60,000 Combining Both Life Annuities 10

12 Comparison of Strength of Stool Legs Social Security Typical Public Sector DB Employee Contributions? Yes Yes Employer Contributions? Yes Yes Required Participation Party Responsible for Paying Benefits Benefit Maximization Strategy Yes US Gov t Paying FICA taxes for 35 years Yes Public Sector Employer Long career with Employer Benefits Payments Term Lifetime Lifetime Survivor Benefits Available? Yes Yes Inflation-protected? Yes Maybe Strength of Stool Leg Strongest It Depends 11

13 Years of State/Local Gov't Service End of Career Pay $30,000 49% 57% 64% 72% 79% 87% 94% $40,000 45% 52% 60% 67% 75% 82% 90% $50,000 42% 49% 57% 64% 72% 79% 87% $60,000 40% 47% 55% 62% 70% 77% 85% $70,000 38% 46% 53% 61% 68% 76% 83% $80,000 37% 45% 52% 60% 67% 75% 82% $90,000 36% 43% 51% 58% 66% 73% 81% $100,000 34% 42% 49% 57% 64% 72% 79% Combined End-of-Career Pay Replacement from Social Security and Typical State/Local DB 12

14 Short-Term Employee Long-Term Employee Contributes to DC Will have two legs of stool Social Security and Individual Retirement Savings Will have all three legs of stool Social Security, Pension and Individual Retirement Savings Doesn t Contribute to DC Will only have one leg of stool Social Security Will have two legs of stool Social Security and DB pension One of my favorite four-boxes 13

15 Creating Valuable Benefit Plans for Public Sector Employees. Presented by: Glenn Sherman, Vice President, Retirement Plans, ICMA-RC June 2, 2015

16 Today s Focus Creating valuable benefit plans for employees Educating employees and encouraging participation Helping employees help themselves Investing for retirement Developing a retirement income strategy Continuing engagement with retirees 15

17 Creating Valuable Benefit Plans for Employees Employees taking on more responsibility Prevalence of Defined Benefit pension slowing being eroded Particularly for future public sector employees Future of Social Security benefits uncertain Increasing reliance on employer-based savings plans (e.g., 457 Deferred Compensation, 401 Defined Contribution) The only leg of the three-legged stool individuals can control Crucial component for public sector employees How do we create employer-based savings plans that will truly benefit employees? 16

18 Helping Employees Help Themselves Make things easy for employees! Simpler is better Avoid information overload Online and mobile access is the way of the future Enrollment Contribution changes Withdrawals Automatic enrollment Sometimes we all need a little push Growing prevalence in the private sector; yet to take off in public sector 17

19 Using Automatic Enrollment to Increase Participation Select a realistic default contribution amount Automatically increase contributions each year Sometimes we all need a little push In addition to new hires, consider automatically enrolling current employees Employees have ultimate control Stop participating at any time Account balance refundable within first three months of enrollment Change contribution amount and investment allocation at any time 18

20 Educating Employees and Encouraging Participation Employer education and support is vital to plan success Be an advocate for the plan, not a bystander Create plan awareness Ensure relevant participant education Promote success stories of older employees and retirees New employees often trust and respect the opinions of older and more experienced co-workers Change the mindset Supplemental plans must be viewed as crucial components of an employee s retirement income strategy, and not an afterthought 19

21 Create Relevant Participant Education Life Stage Online/Multimedia Group Seminars Publications Individual Meetings To enhance the effectiveness of your education program, provide information through multiple channels and avoid a one size fits all approach. Confidential and Proprietary

22 Investing for Retirement Diversification is key Keep things simple Beneficial for many employees Offer single fund/service solutions that provide appropriate diversification Target-Date Funds Target-Risk Funds Managed Accounts Offer choices for do-it-yourself investors 21

23 Investing for Retirement Target-Risk Funds Target-Date Funds Managed Accounts Asset diversification þ þ þ Takes age into account þ þ Takes risk tolerance into account þ þ Asset allocation shifts over time þ þ Considers other assets and income þ Additional fees þ 22

24 Developing a Retirement Income Strategy Lifetime income is the key Keep things simple Beneficial for many employees Offer single fund/service solutions that provide appropriate diversification and generate retirement income Retirement Income Funds Managed Accounts (In-Retirement) Guaranteed Monthly Withdrawal Benefit (GMWB) Funds Convert defined contribution plan balances into defined benefit type retirement income Do-it-yourself investors can create their own discretionary retirement income stream 23

25 Developing a Retirement Income Strategy Retirement Income Funds Managed Accounts (In-Retirement) GMWB Funds Asset diversification þ þ þ Designed to generate retirement income over life expectancy Payments guaranteed over lifetime Considers other assets and retirement income þ þ þ þ þ Additional fees þ þ 24

26 Continuing Engagement with Retirees Retiree education by plan provider increasingly important Ensure retirees have access to information needed to successfully manage finances in retirement Relationship/outreach doesn t end at retirement Pursue forward looking efforts to strengthen income component of employer-sponsored plans and mitigate longevity risk Solutions to convert defined contribution balances into defined benefit type income Combine traditional defined contribution payouts with longevity insurance to protect against outliving assets 25

27 Developing a Comprehensive Benefit Strategy Health Benefits Presented to GFOA 2015 Annual Conference by: J. Richard Johnson Senior Vice President, National Public Sector Health Practice Leader rjohnson@segalco.com June 2, 2015 Copyright 2015 by The Segal Group, Inc. All rights reserved.

28 Public Employers/Employees Have Had It Easy Ø Few, if any, Federal regulations governing public sector health benefit plans Ø Benefits designs and employer subsidies have fattened over time in place of direct pay increases Ø Hire to grave benefit promises Ø Retirees are rated as part of overall group, so their base premium rates are understated to actual cost Ø Employees and retirees are sheltered from having to make detailed choices among cost, coverage, networks, accessibility Ø Management of benefits access and service steerage usually stops short of patient coercion Ø No taxability issues for employers or plan members 27

29 The Playing Field Has Changed! Why it s different now and for the future Health Care Reform places new and increasingly more stringent requirements onto public sector health plans The Federal Government is now a player in every state and local jurisdiction health plan. Medicaid now impacts more employees and dependents Public employers have had to make significant changes to their health plan eligibility rules and/or workforce composition An individual now has the ability to buy individual insurance without pre-existing conditions outside of an employer health plan Public plans have a new competitor (state marketplaces) that may eventually be more cost effective for some groups 28

30 Threshold Changes Ø The Floor Federal law now mandates public sector employers and plans to provide a minimum level of benefits Ø The Ceiling By 2018, the 40% Excise Tax imposes an effective maximum on pre-tax health benefits Increasing clamp on the richness of employer provided health benefits Combined with reduced health care spending account cap Ø The Delivery Vehicle State health insurance marketplaces provide a new delivery vehicle for both individual and employer sponsored health insurance Standardized benefit levels will increasingly become the norm for defining health benefit choices Smaller private employers will ultimately use the SHOP exchanges as the most efficient way to offload health benefit administration as a required employment tax Ø The Safety Net Medicaid is now a factor for lower paid employees and their dependents, as well as for retirees 29

31 Big Issues Public Employers Must Address Ø No longer just How well can we manage health plan costs? but now How long can we keep doing what we ve been doing? Ø How will we maximize federal health benefit subsidies to ease our budgetary issues while trimming benefits to avoid excise tax penalties? Ø How will we attract new employees who are settled into health exchange coverage and no longer consider health benefits an employment motivator? Ø How can we maintain generational equity and balance among stakeholders with the large influx of retiring Baby Boomers? 30

32 Big Issues Public Employers Must Address Ø How will we realign our retiree health benefit promises to send the right message for the future? Social Security Normal Retirement Age continues to increase Public sector retirement and health benefit plans encourage early retirement Economic needs encourage longer employment just to keep subsidized health benefits Early retirees can now qualify for subsidies on the state health exchange even if eligible for employer plans 31

33 And Don t Forget the Environmental Factors Ø The population keeps aging (Older = Sicker = Costlier) Ø The cost of health care keeps rising faster than inflation Ø Life expectancy is still increasing Ø More seniors are having to go back to work to make ends meet, even with retirement benefits 32

34 Why Do People Work for Government? In the Past 1 Public service Now Health benefits 1 2 Stability of employment Stability of employment 2 3 Retirement benefits Work environment 3 4 Work environment Retirement benefits 4 5 Compensation Public service 5 6 Health benefits Compensation 6 Health benefits have changed from an attractive perk to a major reason for government employment 33

35 Retiree Health Benefits Are Under Attack Eligibility cut backs Medicare Advantage / Medicare Part D Plan availability reductions OPEB cost and liability reduction Benefit reductions to avoid 40% Excise Tax Public and private exchanges Reduction in employer provided subsidy ACA requirements for employer group health plans 34

36 How Health and Retirement Benefits Interact Ø Medical inflation is higher than general inflation Medical plan increases based on a higher trend than any retirement COLAs COLAs are vanishing or being limited Ø Increasing share of a retiree s fixed pension benefit goes to pay for health benefit coverage Ø Medicare helps starting at age 65, but not a free ride Ø Average couple retiring at age 65 now will need $220,000 or more to pay for their health care costs during retirement. 1 Even after Medicare coverage Does not include nursing home costs 1 Fidelity Viewpoints, June 11,

37 Develop a Comprehensive Benefit Strategy Health Benefits Ø Divide and conquer - separate plans for actives and retirees Specifically designed for their needs Medicare Advantage / Medicare supplement / Private exchange Public exchange for early retirees possibly allows them to get federal subsidy Reduce OPEB liability Lower premiums for actives Ø Clean up your act Eliminate unnecessary benefits perks or drains? Think voluntary coverage Ø Promote Wellness both Physical and Financial Health fairs are fun, but Financial planning may be more beneficial to employees in the long run 36

38 Develop a Comprehensive Benefit Strategy - 2 Ø Target the communication to the audience Size up your population Demographics Job environment Desk or street? Factory or think tank? Different people learn differently To be effective, must have Different messages (even if the same plans) Different emphasis for different groups and ages Different channels Multiple channels Ø Present benefits as a package always! Retirement Health Work Environment Pay Develop common branding across all benefit types and use it! 37

39 Develop a Comprehensive Benefit Strategy 3 Ø Take the employee/retiree viewpoint in making decisions on benefit changes and costs What percent of take home income does the employee/retiree spend now on health and retirement benefits? Can the employee or retiree afford the premium increase? Will the copay or deductible increase cause lower paid workers to avoid seeking necessary care? What s the five-year horizon of expected employee/retiree cash outlay for the change? Will there be pay adjustments / COLAs to help offset the additional plan cost? Ø Show detailed examples of real people situations Helps employees/retirees relate and understand their choices across plans 38

40 How to Begin Ø Get all the decision makers together Talk overall financial stream in career and retirement Promote a common understanding Accountability across departments/agencies Ø Develop an overall strategy Start simple and don t overdo too early Ø Focus on the important things First on affordability for the employee/retiree Then on what the employer must provide Then on what you can provide within budget Know and monitor all three factors each year Use them as a yardstick in assessing possible changes Ø Decisions won t be easy, but it helps to have a common vocabulary and measurement standards 39

41 Health Reform Resources On the Segal Website: Rick Johnson Senior Vice President Ø Health Care Reform Timeline Ø Health Care Reform Insights Ø Stat! Ø Bulletins Ø Public Sector Letters Ø Webinar recordings and slides Health Reform Resources: 40

42 Please provide feedback on the session Ø Quick Text Feedback 1. Step 1 - Text GFOA to Step 2 - Did the session meet your expectations for being high quality and relevant to your job? Exceeded Expectations Text T6EXC Met Expectations Text T6MET Did Not Meet T6NOT Ø To provide more detailed evaluation on the session or full conference to go 41