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House Proposal to Sub HB2194



Wednesday, April 27, 2011

Tier 1: active member choice between

1. Increased employee contribution to 6% with increased multiplier of 1.85 - default if IRS over rules choice

2. Employee contribution of 4% with multiplier of 1.4 - default if no member selection made

Tier 2: active member choice between

1. Increased employee contribution to 8% with increased multiplier of 1.85, COLA after age 70

2. Employee contribution of6% with multiplier of 1.4, COLA after age 70- default if IRS over rules choice or no member election made

Tiers 1 & 2: Inactive members

1. Vested: One time choice should they become active again

2. Non-vested: Default member selection if they become active again

Active member choices: One-time (irrevocable), 90 day period that will end at the same deadline for selecting health benefits in October of 2012

Employer Contributions

1. Increase cap to .7 in FY 2013

2. Increase cap to .9 in FY 2015

3. Increase cap to 1.1 in FY 2017

4. Increase cap to 1.3 in FY 2019

Defined Contribution component

1. Effective beginning date July 1,2013

2. Final details determined in 2012 Legislative session after receipt of the special commission report

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3. Optional employer increase in annual match based on current FY employer budget, but

not to go below baseline of3%

a. State SGF for State employees

b. Local employers

c. Dept of Ed for K12

d. Regents for higher ed

4. Option for employee to contribute more if desired

Special Commission - clearly defined scope:

1. Fully evaluate results of 2011 KPERS reform bill, to include the fiscal impact on

future generations of Kansas taxpayers

2. Assess any impact on the state's bond rating

3. Assess total cost of administering a DC for next 50 years

4. Direct an actuarial audit of results from existing actuarial finn, with the option of directing a replication study if problems found

5. Evaluate and report on pros and cons of involvement of a Third Party Administrator

foraDC:

a. Member directed investment

b. Risk-managed approach by a TPA

c. Active member has choice of either of the above

6. Evaluate the pros and cans of re-amortizing the UAL to the maximum time allowed under federal law

7. Address any significant issue that surfaces in the course of their investigation

Commission membership same as Sub for HB2194 with following additions:

1. Total of 13 members

2. 5 appointees from the governor with at least one two practicing lawyers

3. The four at-large members appointed by legislative leadership must be neutral (not be active or inactive KPERS members nor paid representative or advocate of such groups)

Clause similar to SS statement on estimated benefits concerning Congressional changes in SS benefits

Adopt House position on the sale of excess real property

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State and local governments have long considered defined benefit (DB) plans to be the chief component in a successful employee retirement program. In recent years, however, deep-rooted financial issues have challenged the sustainability of some traditional DB plans and public policymakers are considering other options.

One possible solution to these challenges is a risk-managed core DC plan model. Unlike traditional 401{k) plans which focus on asset accumulation, risk-managed core DC plans focus on seeking to provide retirement income security, while helping to mitigate the inherent financial risks of traditional DB plans.

This paper explores the components of these plans to better familiarize government representatives with the specific provisions of risk-managed core DC plans.

IMPLEMENTING A RISK-MANAGED CORE DC PLAN DESIGN

Depending on the specific state or local government's objectives and legal environment, the DC plan would be open only to new employees, or to both new employees and select existing participants.

Some governments have reservations about migrating from the traditional DB structure to a core DC format, Plan sponsors cite a variety of risks that can cause standard DC designs to fail, including inadequate savings and confusing investment choices.

However, plan sponsors can establish plan features that will help ensure adequacy

of contributions and Investment structures that support appropriate investment decision-making. Plan objectives should include:

Provide Employees with the Means to Build Sufficient Savings. While participation is key, so are contribution rates. Undersaving remains one of the biggest factors affecting retirement preparedness. Plan sponsors can help by setting:

II Shorter vesting schedules.

II Total contributions by employer and employee that represent at least 12% of employee pay if the partlcipant will receive Social Security, and at least 18% if the participant will not be receiving Social Security benefits. Higher contribution rates for public safety employees are needed to address earlier retirement ages.

Ensure PartiCipation In the DC Plan. A common misconception about DC plans is that they lower participation. Plan sponsors can establish plan features that encourage participation and overcome employee inertia, by establishing:

• Mandatory enrollment through an automatic enrollment mechanism.

• Lower, or no, age restrictions on participation.

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CREF

Financial Services

"

Help Employees Manage Risk and Maintain a

Long-Term View. One concern about DC plans is that they may burden participants with investment decision-making and may lead them to make poor decisions about how to invest their retirement accounts. Since employees need to properly diversify their investments, and rebalance their portfolios regularly to maintain a prudent asset mix. these aspects need to be incorporated in plan features. With the proper plan architecture, plan sponsors can support wise participant investments, by offering:

a A limited lower cost investment menu that would include a maximum of 15-20 preselected options representing the various asset classes.

iii Automatic asset allocation vehicles such as lifecycle or target date funds .

• Individual investment advice to help educate partiCipants and enhance their decision-making prowess.

Focus on Retirement Income Employees Will Not Outlive. Too many standard 401(k)-style retirement plan models focus exclusively on accumulation, and fail to include a payout feature to help ensure that retirees will not outlive their savings. The new core DC plan should "include:

a A mechanism to automatically convert a sufficient portion of an employee's DC account balance to

a low-cost annuity upon retirement, to guarantee lifetime income.

• Restrictions to prevent employees from taking large early distributions from their plan, thus preventing "leakage" from their accounts and helping employees retain sufficient assets for retirement.

A LONG-TERM PERSPECTIVE

Applying risk-managed principles to a core DC plan prevents the plan from operating like a traditional 401(k), ensuring that the DC plan will responsibly meet the retirement needs of employees. In addition, a shift to a DC plan structure will help to mitigate some of the long-term systemic issues of DB design. Risk-managed core DC plans are a reasonable alternative to the - retirement plan pressures state and local governments face today.

n for your employees. For more EF can help, please contact:

Name Here our Phone Number Here

• Source: LlMRA, Not-for·Profit Market Survey, truro-quarter 2010 results. Average assets per participant based on full-service business.

You should consider the Investment obJectives, risks, charges and expenses carefully before investing. Please call 877 518-9161, or go to tlaa-cref.org for a current prospectus that contains this and other information. Please read the prospectus carefully before Investing.

Annuity contracts and certificates are issued by Teachers Insurance and Annuity Association (TIAA) and College Retirement Equities Fund (CREF), New York, NY. TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products.

For Institutional Investor Use Only. Not for Use with or Distribution to the Public.

TIAA CREF

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___ . .~ __ ~ .. _ _...- ._. __ • -........._ _._. __ ---J

© 2011 Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF), New York, NY 10017

Financial Services

C49890 (AP10029/95908)

"Retirement

"Disability

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"'Family "Survivors

Medicare

You have earned enough credits to qualify for benefits. At your current earnings rate, if you continue

wo.rk:ilJg,untib. ".J!.~~,;~"" . ., ,. .,' .~r-- 12 ;".,

your full retirement age (~7.years). your payment would be about .. , .. ',' , ..... $ 1,214 a month

10 >:.'!r·.!I'h"" 'b $ 1 505 a m' ·o~n· th

age , your payment woutc. e a out, , , .. , . , .. ' . . . . .. . . . •

age 62, your payment would be about , , .. , .. , . , , .. , , , $ 855 a mohih

You have earned enough credits to qualify for benefits. If you become ddsabled right now ...

Your payment would be about , , , . , $ 1.411 a month

!fyou get retirement or disability benefits, your spouse and children also may qualify for benefits.

You have earned ~J;lRugh~c.f~p.j,n,; for your family to receive survivors benefits. ' If you die this' year,

certain members of your family may qualify for the followillg benefits: :>;' ,

Your child A A.:..~.:·:~l.·d:· , , . , .. , , $ 1,05,8 a month

Your spoRSe Wh9J!;,PJI.$g4>.J~.our child , , , - , . ',.',," $ 1;058 a month

Your sjiouse 'who'reacne";1ffi1 retirement age , .. , .. , , . , t • :$ 1.4J 1 a month

Total fanilly beneffts'cannotbe more than. , , .. , .. , . , .. , $ 1,63] a month

Your spouse or minor child may be eligible for a special one-time death benefit of $155.

You have earned enough credits to qualify for Medicare at age 65, EVeD, if you do not retire at age 65, be sure to contact Social Security three months before your 65th

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"Your estimated benefits are based on current law. Cong.ress has made changes to the lall' in the past and can do so at any time.

The law governing benefit amounts may change because, by 2037. tbe payroll taxes collected will.be enough to.,pay ollly about 78

percent of scheduled . ~,

HoW ·Y9,ur 'Be n efits Are E~Jh.,u~ted

TOiq~JlJifY. f~r.'\>p'¥~fj.ts. ir.,QU earn "credits",thf9~gh.your wo-rItc J)P'p}~~ f?,W ~r,ach y~ar. This year, for ex~pb~,l'0u earn gT!~.9~~rw e~ch $1,120 of wages or setfi.~pl~yment inconi~.' WifeD: 'You~tte earned $4;480; you've ~amea your four credits ifOi1he ye:1D:. -Most people need 40 cr¥diis; earned over their w"btKifig lifetime, to receive retiremenrbenefnse For disability:i¥iti.ts.~vors benefits, young people need fewer credits-to be eligible.

fu~~~g.Y..9.s..!!t.q9rgs 19 ~.ee wli¢tom .y'Q.u1i~~~" e§fued enougf credits' to ~qu.a1ify for benefits. Ifyci1t"ha~en~f,:eamed enough .. yet.to·quali:fy for-any type of benefit, we-can't-give you a~~eriefit'estimate now; If-you continue to.work.we'll give y~g, aJ;I. e~timAte when you do qualify.

W:hahve· assumed - If you have enough work-credits, we est;.l1lil.~ed yom: benefit amounts using YO1¥" average earnings over your working lifetime. For 2o.1.J and.later (up to retirement age), we assumed you'll continue to work and make about the same as you did in 2009 or 2010. We also included credits we assumed you earned last year

and this year.

Generally, the older you are and the closer you are to retirement, the more accurate the retirement estimates will be because they are based on a longer work history with fewer uncertainties such 'as earnings fluctuations and future law changes. We encourage you to use our online Retirement Estimator at www.socialsecurity.gov/estimatar to obtain immediate and personalized benefit estimates.

We can't provide your actual benefit amount until you apply for benefits. And that amount may differ from the estimates stated above because:

(1) Your earnings may increase or decrease in the future. (2) After 'lOU start receiving benefits. they will be

. adiusied lor cost-of-living increases ..

(3) Y;9u~ .. estimated beP(}:f,it§.~_~~~Q!!·.c~~· ,:r4~r._' Iawgoverning beDefi.~A~o u nts ~~y.cbaDge.

(4) Your'benefn amount ma)(He'affeCt:ea by military service, railroad elllplijyffi~ni ·or 'pensiollS earned through work 01,1 w"'icb.~pllAid,no~,p~y Social S~1irity tax. Visit e- lfif.WJ.~~iaJl~cuiify.govAnystiltement

to learn more. '.- .

Windfall EliminatioD P.rov4!J~9''':"(W~.) ~lf¥.ou receive a pension from employment ,inwliich you did not pay

~~~~."~;~;&,~i~:!~~~nil~%t~igclfit~", ~

Security benefit may be rep.Y~~'l:r..RP! n?t. eliminated, by WEP. The amount of the re(b~qt}~g~ If any, depends on your earnings and number ofyeai-'S" irt'jbbs in which you paid Social Security taxes, and the 'y6"ir you-are age 62 or become disab1ed. To estimate WEP~s 'effect on your Social Security benefit. visit www.sociaisecurity. • ...govIWEP-CBtUlT.In 2011, the maximummonthly'reduction is $375. For more information, please see Windfal] Elimination Provision (Publication No. 05-10045),~t www.socialsecllrity.govIWEP.

Government Pension Offset (GPO) - If you receive a pension based on federal, state-or local government work in which you did not pay Social Security taxes and you qualify, now or in the future, for Social Security benefits as a current or former spouse, widow or widower, you are Iikely to be affected by GPO. If GPO applies, your Social Security benefit will be reduced by an amount equal to two-thirds of your government pension, and could be reduced to zero. Even

if your benefit is reduced to zero, you will be eligible for Medicare at age 65 on your spouse's record. To learn more, please see Government Pension Qffsel (P ublicaton

No. 05-J0007) at Wwws(l:::ia/security.gm,IGPO,

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