Government market update
General retirement plan trends
WW 57%
of state and local government employees, including K-12 staff, expect to retire later
than they would like. 1
WW 72%
of full-time state and local workers believe that a traditional pension or cash balance
plan will be a major source of retirement income;1 however, only 32% of workers who leave
state and local employment each year claim an immediate benefit. 2
WW Pensions
and post-employment healthcare benefits are expected to be the subject of
restructuring efforts in many states and communities, with several state and local
legislatures reviewing hybrid DB/DC or core DC pension options.3
Government retirement plan trends
WW Around
two-thirds (68%) of government organizations have a DB plan in addition to
a DC plan. Of those that do offer a DB plan:
–– 59.3% offer a DB plan open to all employees.
–– 8.7% have frozen their DB plan.
–– 7.7% have a soft freeze (no new participants but benefit accruals continue for plan
participants).
–– 1.0% have a hard freeze (no new participants and benefit accruals have stopped for
existing participants).4
WW Government
retirement plans will likely face ongoing challenges as a result of lower
revenues, increasing budget deficits, and decreasing federal spending.
WW Of
those who retire, most households with state and local employment end up with
replacement rates that, while on average higher than those in the private sector, are well
below the 80% estimated as needed to maintain preretirement living standards.5
WW Compared
with the 403(b) population, 457(b) government plan participants tend to be
disproportionately male (63% vs. 55%), younger (81% younger than 50 vs. 68%) and
expect to contribute a lower percentage of salary to their DC plan.6
Public K-12 retirement plan trends
WW Consortiums
among public K-12 school districts are a growing trend as school
administrators and other groups come together to leverage economies of scale with the
objective of providing better retirement outcomes for teachers, administrators and staff.7
WW K-12
workers are one of the fastest growing groups of personnel in state and local
governments.8
WW Only
20% of K-12 employees have spent a significant time considering how they will manage
their savings in retirement and draw income from it.1
WW Participation
rates in 403(b) plans in the public K-12 segment are lower than in other
segments of the NFP market, averaging only 30%, with lower participation attributed to DB
plan coverage for K-12 staff.9
Government market update
TIAA-CREF: Government and K-12 know-how
We offer:
WW Streamlined
administration
and recordkeeping services
WW Full
fiduciary and compliance
services
WW Expansive
investment product
offerings
WW Comprehensive
employee
services
WW Dedicated
client service
WW Streamlined
process
implementation
TIAA-CREF is committed to helping you provide the best retirement and savings plans for
your clients, as well as leading investment products for investment-only platforms. The
TIAA-CREF Consultant Relations team is here to work with you on retirement plan
administration and open-architecture investment menus and to provide TIAA-CREF’s
perspective on investments, industry trends and regulatory issues.
TIAA-CREF has a unique business and service model, one that offers one of the best total
values in the marketplace for governments and public K-12 school districts organizations
offering hybrid DB/DC, core DC, supplemental 457(b), 403(b), 401(a), and retiree health
retirement programs. We manage more than $150 billion in assets for our public sector
clients - more than one-third of all assets in the public sector marketplace overall10 - and we
are the leader in the combined public and private K-12 market.11
TIAA-CREF resources
Our expansive resources help you help your clients in the government market. We invite you
to download and share the following thought leadership pieces. For additional resources
please visit our Financial Professional page at know-how.
The hybrid DB/DC plan model:
An effective approach for
government pension providers
October 2011
Advice: a practical, prudent approach
trenDs anD issues
Setting a course for retirement security
These developments also come against the backdrop of a number of other
challenges that impact retirement income: higher healthcare costs, increased
longevity, and government-provided guaranteed income that is rarely sufficient to
maintain one’s desired standard of living (for the average retiree, Social Security
replaces only 40% of preretirement income).
Lifetime Income in Defined
Contribution Plans: A
Fiduciary Approach
C. Frederick Reish
(310) 203-4047
Fred.Reish@dbr.com
www.drinkerbiddle.com/freish
A WH ITE PAPER BY
FR ED R EISH , BR U C E ASH TO N AN D J O SEPH FAU C H ER
The net effect has been a decline in Americans’ retirement security. In 2009,
research from McKinsey and Company found that the average American couple will
face a savings gap of $250,000 at the time of retirement. 1 Retirement account
balances continue to struggle to recover from the financial crisis. And by any
measure, most American workers have simply not saved enough.
The savings gap is one reason a growing percentage of older Americans are staying
in the workforce longer. The labor-force participation rate for men age 55 and older
has increased from 37.7% in 1993 to 46.4% in 2010. Similarly, the labor-force
participation rate for women 55 and older has increased from 22.8% in 1993
to 35.1% in 2010—the highest recorded level. Among those 65 and older, the
participation rate increased from 13.7% in 1975 to 17.4% in 2010. 2
There is a clear and compelling need to better prepare Americans of all ages—but
particularly those 55 and over—for how to achieve financial security in retirement.
Many different tools can be deployed to meet this objective, but the financial crisis
provided a reminder that many, if not most, individual investors find it difficult to
develop, and continually refine, a suitable retirement portfolio. The focus of this
paper is how individualized advice can help American workers and their families
overcome that difficulty and position themselves to achieve not just greater
retirement savings, but also a comprehensive understanding of how to develop an
income model that will lead to self-sufficiency in retirement.
W
Provide adequate and secure income throughout retirement as a formal primary objective.
This supports work force management mandates, including attracting and retaining quality
employees and facilitating an orderly transition into retirement.
W
Provide full-career employees with a target replacement income from all sources at a level
sufficient to maintain the employee’s preretirement standard of living during retirement.
W
Recognize the needs of a mobile work force by offering equitable benefits for less than
full-career employees in a manner consistent with work force attraction, retention and
budget objectives of the employer.
(310) 203-4048
Bruce.Ashton@dbr.com
www.drinkerbiddle.com/bashton
W
Take risks into account to create a high degree of certainty that participants will achieve
an adequate and secure income throughout retirement. The plan design should address
funding-shortfall risk (the risk that total employer and employee funding is not adequate to
achieve the desired income replacement objectives); longevity risk (the risk that the retiree
will outlive his or her retirement assets); investment risk, including normal market volatility
and risk attributable to more severe economic downturns; inflation risk; and annuitization
rate risk.
W
Recognize that achieving retirement income adequacy and security for employees is a
responsibility to be shared between the employer and employees. Employee participation
in a primary retirement benefit plan should be mandatory. Both the employer and
employees should share in the cost and risk of funding plan benefits.
Joseph C. Faucher
The Hybrid DB/
DC plan model:
An effective
approach for
government
pension providers
David p. richardson
principal research Fellow
tiaa-creF institute
We thank the California, Texas, Iowa, and Arizona systems for providing data and Benjamin Bissette for excellent research assistance.
Any errors are our own.
executive summary
Many legislators and other government policy makers remain unfamiliar with how hybrid
DB/DC plans can be successfully structured. This paper explores the components and
best practice design features of these plans and specific plan provisions to serve as a
guide to state and local governments that are considering a hybrid DB/DC solution.
There are several principles that should be taken into consideration when designing any
government retirement program. Retirement plans should:
Lifetime income
in a defined
contribution plan:
A fiduciary
approach
robert clark
professor of economics
professor of management,
innovation, and entrepreneurship
north carolina state university
As an alternative, many state and local governments are turning to hybrid DB/DC plan models
as a balanced approach to reduce their singular reliance on, and help avoid the financial risks
of, the traditional DB plan of the past, while preserving the positive features of those plans.
Unlike traditional 401(k)-style defined contribution (DC) plans, which focus on asset
accumulation, the new hybrid DB/DC plans should continue to focus on seeking to provide
retirement income adequacy and security. The DC components of these hybrid approaches
should also include features that mitigate investment and longevity risk for employees while
providing funding stability and budgetary predictability for government employers.
Key principles for effective plan design
Bruce L. Ashton
2012 Retirement Confidence
Survey of the State and Local
Government Workforce
Who’s Watching the Door? hoW improving
403(b) aDministrative oversight can improve
eDucators’ retirement outcomes
Given these financial realities, many governments are now examining whether standard
401(k) plans can help, but are finding that these plans have their own shortcomings that
make them unsuitable as vehicles for providing adequate and secure retirement income
for public employees.
(310) 203-4052
Joe.Faucher@dbr.com
www.drinkerbiddle.com/jfaucher
Advice: A
practical, prudent
approach: Setting
a course for
retirement security
NOVEMBER 2010
Historically, state and local governments have successfully relied on defined benefit (DB)
pension plans as the fundamental component of a successful employee retirement
program. But, in recent years, deep-rooted financial issues have emerged and challenged
both the sustainability of some traditional DB plans and the ability of governments to
provide required public services.
The curious course of advice
The largest generation in U.S. history is moving into retirement.
Indeed, according to the U.S. census, more than 10,000 Americans
reach the age of 65 every day. This pattern is projected to
continue for the next 19 years, according to the non-partisan
Pew Research Center. This translates to approximately 70 million
Americans gradually drawing down their accumulated savings.
As this sweeping change is unfolding, American workers face
continued uncertainty in financial markets, a recession and a weak
economic recovery—all of which have contributed to an erosion in
confidence about the ability to achieve financial security.
This paper examines how different administrative and oversight models for public K-12 supplemental 403(b) plans can
affect the number of providers, products, investment options, and the level of fees that educators pay on their retirement
saving accounts. Examining data in four states, we find:
Supplemental
457(b) plan guide
A quick reference for
government plan sponsors
• The process by which plan providers are certified to offer supplemental retirement plans to educators can be sorted
into two administrative levels (state or local school district) and two models of management and oversight (open
access or controlled access).
• Open access management typically allows “any willing provider” access to plan participants. Plan sponsors offer
403(b) plans with limited screening and oversight of the vendors seeking certification. Plan sponsors typically do
not negotiate fees prior to certification nor do they monitor the vendors after certification. States using the open
access model generally have supplemental 403(b) plans with a large number of providers and investment options,
a broad range of relatively high fees.
A joint research project of the Center
for State and Local Government
Excellence and the TIAA-CREF Institute
July 2012
• Controlled access management limits the number of providers in the plan. Plan sponsors typically use a competitive
bidding process that requires potential venders to submit proposals that include information on the investment product
menu and associated fees. Fees are often a key factor in the review process. States and school districts using the
controlled access model tend to have a relatively small number of choices of providers and investment products, and
relatively low overall fees.
For Institutional Investor Use Only. Not for Use With or Distribution to the Public.
Supplemental
457(b) plan
guide: A quick
reference for
government plan
sponsors
Whitepaper: How
improving 403(b)
administrative
oversight can
improve educators,
retirement
outcomes
Retirement
confidence
among public
sector employees
Center for State and Local Government Excellence and TIAA-CREF Institute, 2012 Retirement Confidence Survey of the State and
Local Government Workforce.
2
Trustees of Boston College, Center for Retirement Research, How prepared are state and local workers for retirement, October 2011
3
Moody’s Investment Service, Outlook for U.S. Local Governments Remains Negative in 2012, February 1, 2012
4
PLANSPONSOR 2012 DC Survey (Combined Government/Public Works Industry Report) ©2012 Asset International, Inc.
5
Trustees of Boston College, Center for Retirement Research, How prepared are state and local workers for retirement, October 2011
6
Brightwork Partners, November 2012, Voice of the Defined Contribution Participant
7
RRI, What’s New in the 403(b) Profile Release, April 2011
8
U.S. Census Bureau, Labor Force, Employment & Earnings: Employment Projections, Employment Projections by Industry.
9
Spectrem Group, 2007 & 2010, Not-for-Profit Sector Public K-12 Defined Contribution Plans.
10
Spectrem Group, Retirement Market Insights 2012, based on total public sector DC and 457 plan assets of $493B.
11
L IMRA, Not-for-Profit Market Survey, third-quarter 2012 results. Based on a survey of 29 companies; TIAA-CREF assets under
management by market segment estimated; segment breakdown based on approximately 20 companies representing nearly 98%
of the total reported full-service assets. Market share ranking does not reflect current investment performance.
1
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C7832
For institutional investor use only. Not for distribution to the general public.
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