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An Analysis of Defined Contribution (DC) Plans Great Plains Public Employee Retirement System Forum November 14, 2007

An Analysis of Defined Contribution (DC) Plans Great Plains Public Employee Retirement System Forum November 14, 2007. Jon Forman, Vice Chair, Board of Trustees Oklahoma Public Employees Retirement System (OPERS) www.law.ou.edu/faculty/forman.shtml. Overview. OPERS and SoonerSave

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An Analysis of Defined Contribution (DC) Plans Great Plains Public Employee Retirement System Forum November 14, 2007

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  1. An Analysis of Defined Contribution (DC) PlansGreat PlainsPublic Employee Retirement System ForumNovember 14, 2007 Jon Forman, Vice Chair, Board of Trustees Oklahoma Public Employees Retirement System (OPERS) www.law.ou.edu/faculty/forman.shtml

  2. Overview • OPERS and SoonerSave • Fees and Individual Accounts • Improving Asset Allocations for Individuals

  3. Board of Trustees ORGANIZATIONAL STRUCTUREOklahoma Public Employees Retirement System Advisors & Consultants Executive Director General Counsel Director of Member Services Director of Information Technology Chief Investment Officer Director of Finance and CFO Assistant CFO Financial Services Administrator Defined Contribution Plans Manager Communication & Counseling Administrator Member Services

  4. OPERS Traditional DB Plan6/30/2006 Active OPERS Members 45,472 Retired OPERS Members 24,372 OPERS Plan Net Assets $5,817,165,538 OPERS Funded Ratio 71.4%

  5. SoonerSave • Division of the Oklahoma Public Employees Retirement System (OPERS) • Administered by 13 member Board of Trustees • One of the first deferred compensation plans for public employees • Top ten State plans in participation %. (67% as of 9/30/2007)

  6. SoonerSave

  7. SoonerSave - Contribution Limits for 2007 • Regular $15,500 • 50+ Catch-Up $20,500 • for employees age 50 and older • Standard Catch-Up $31,000 • available 3 years prior to year of retirement

  8. SoonerSave – Investment Options • Bond • Balanced • Large-Cap • Mid-Cap • Small-Cap • International • Stable Value • Self-Directed Brokerage Option

  9. SoonerSave

  10. SoonerSave 457 Plan Review As of12/31/06

  11. Fees • Portfolio management, fund administration, shareholder service, and other miscellaneous costs. • GAO these investment fees make up 80 to 99 percent of fees • Record-keeping fees associated with maintaining participant accounts, processing fund selections, and mailing account statements. • Fees associated with setting up a plan and explaining it to employees Source: U.S. Government Accountability Office, Private Pensions: Changes Needed to Provide 401(k) Plan Participants and the Department of Labor Better Information on Fees (GAO-07-21, 2006)

  12. Fees Hurt • Imagine a 45-year-old employee who plans to leave $20,000 until age 65 • @ 6.5 percent net annual return • 7 percent investment return minus ½ percent for fees • that $20,000 will grow to $70,500 • If fees are 1.5 percent • that $20,000 will grow to just $58,400 • additional 1 percent annual fee reduces account balance by 17 percent

  13. DB Annual Rates of Return outpace DC Plans 1995-2002 (1.3%) Source: Retirement Services Roundtable analysis of Watson Wyatt data

  14. Fees – Recent Developments • Regulation • U.S. Department of Labor • ERISA Advisory Committee • Legislation • Rep. George Miller • Litigation • Breach of fiduciary duties Source: Jonathan Barry Forman, The Future of 401(k) Plan Fees, in New York University Review of Employee Benefits and Compensation—2007, Chapter 9, pp. 9-1 to 9-18 (Alvin D. Lurie ed., 2007).

  15. Improving Asset Allocations for Individuals • Lifecycle Funds • Lifestyle Funds • Managed Accounts

  16. Target Maturity Funds(LifeCycle Funds) • Member chooses fund closest to projected retirement date • Fund will allocate investments over time from aggressive to conservative • Average expense ratio 1.29%* • Meant to be one-stop shop for retirement investing. • Does not consider assets outside the fund or life expectancy • Does not offer employer fiduciary protection *Source: Morningstar as of 12/31/06

  17. Lifestyle Funds • Member selects fund reflecting their risk tolerance: Conservative, Moderate, Aggressive • Meant to be one-stop shop for retirement plan investing • Up to member to consider assets outside of plan in selecting fund • Does not reflect age or other life changes • Does not offer employer fiduciary protection

  18. Managed Accounts • Personalized to individual financial circumstances and retirement goals • Considers Assets outside the Plan • Reflects life and age changes • Employer Fiduciary Protection • Asset allocation based on information provided by member • Asset based fees

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