Retirement Planning: Who does what for whom?
The public sector’s ability to recruit and retain top employee talent in a tight job market and the changing dynamic of retirement planning as a whole are creating new retirement planning opportunities for local government employees. Furthermore, with Social Security and pension reform likely to command serious attention in the next Congress and the largest generation in American history poised to enter its “golden years,” the issue of retirement planning is a hot topic. Consequently, it is not surprising that the demand for government retirement benefits that compete with those in the private sector is a growing issue as well.
Today’s employees are more mobile than ever before, and many workers find career tracks crossing between public service and private sector employment. Those entering public sector employment for the first time may not understand how a change in employer affects their retirement plans. Even for long-term government workers, plan enhancements, such as employer match plans, mean reexamining options.
The landscape of government retirement planning is shifting, and at the foundation of the change is a transition from traditional defined benefit plans to defined contribution plans now common in the private sector. Making major changes in existing public sector retirement plans can create confusion for both new and long-time government employees. Communication and education – about who the pension plan decision-makers are and how a plan gets put into place – are the keys to plan success.
The old idea of the “worry-free pension” for government workers is being replaced by a growing awareness that most people need to supplement defined benefit plans with defined contribution plans and private investments to help ensure financially secure retirements. However, deferred compensation plans require more employee involvement than do traditional plans in order to manage the full range of investment options and enhance the possibility of long-term gains.
Employees who have never given the NASDAQ or NYSE a second thought now check them out regularly because many have portfolios that are somehow tied to their results. “I find myself paying more attention to the investments I’m making on my own,” says one county corrections officer. “Our defined benefit plan provides a good base, but I feel I need a cushion beyond that. In order to be sure I’m ready to retire, I have to be more focused on outside investment opportunities than I have in the past.”
The relevant players
Retirement plan sponsors know the plan selection process can create a spike in the number of questions they receive each day. Some of the answers, at least in theory, lay with the players in the selection process.
In the private sector, a retirement plan is probably selected by a maximum of two or three employees – most likely the CFO and the human resources manager. In government, the goal (selecting a plan) is the same, but the process differs, and the make-up of the players is broader. Typically, a committee or board oversees the plan’s administration and investment structure. While not necessarily part of every entity’s committee or board, key players include:
– Mayors and county executives. Although they are almost never directly involved in the selection of a retirement plan for city employees, mayors and county executives do, of course, have circles of influence. A mayor is likely to have some say about the make-up of the committee that does make the decision, and his or her priorities, such as more education for employees or enhanced plan participation rates, are likely to be reflected in that choice.
– Union representatives. Unions represent a powerful constituency that cannot be ignored. Union representatives often are a direct part of the selection committee, and some committees have a number of union members representing a diverse group of employees. It is wise to be more inclusive of those representatives, although it will throw more variables into the already populated field of decision-makers. Their inclusion can be an important element in creating a warm reception of the retirement plan. Typically, union representatives have dramatically varied levels of experience, which can be advantageous to the process.
– Police and fire personnel. Plan sponsors who represent police officers and firefighters note that they generally have higher participation rates than does the general population. For public safety personnel, investment options are a key focus, and police and firefighters often are quite vocal about which funds should be available through the plan. “Retirement plans are stressed to us as an important benefit when we start the force,” says Janesville (Wis.) Police Officer Chad Sullivan. “[The importance of retirement plans] has raised interest and questions within our ranks.”
– Human resources managers, payroll administrators, personnel department staff and financial officers. The main concern of retirement plan administrators is the amount of time they will need to manage the plan. Typically 90 percent of their time is spent handling other responsibilities, so it is understandable that they want a retirement plan provider that ensures that plan administration is not going to be another full time job.
Some of the administrative burden can be relieved by technology. Call centers with representatives available through an 800 number can resolve almost all employee questions, thus limiting the involvement of the plan administrator. If the vendor has a comprehensive Web site, the Internet is another way to relieve the pressure.
HR managers also can be particularly sensitive to the topic of employee education and generally prefer a vendor that places a strong emphasis on education. In addition to reducing employee inquiries, most vendors know that ongoing education can be the key to success.
– Consultants. Although consultants are not members of the actual selection committee, they are gaining power in the decision-making process because they bring expertise and provide recommendations to the government entity.
A retirement plan decision is a unique and highly regulated process. Each government entity has its own individual process that adheres to its legislative rules, but most selection processes can be simplified or broken down into two basic phases: the search for a new provider and Due Diligence.
The Request for Proposal (RFP) is the beginning of the search for a retirement plan provider. After reviewing plan characteristics and information requested, vendors decide if they want to participate in the process and notify the plan sponsor of their intent to submit a proposal. During the bidder’s conference, vendors have the opportunity to ask questions of the government entity prior to composing the RFP.
Due Diligence is comprised of the analysis and final presentation phases. The analysis phase allows selection committees and consultants to thoroughly evaluate RFPs and narrow the field to a group of vendors considered finalists. Finalists often are asked to provide additional information based on the RFP and may even be asked to host a site visit. In addition, there is a growing trend toward participation in a new phase, called “best and final offer,” which allows firms designated as finalists to improve on their original offers based on information gleaned along the way.
Once full analysis is complete, finalists move into what is sometimes known as the closed-door or executive session phase. Each vendor makes a 30- to 40-minute presentation to the selection board during which competencies and competitive advantages are highlighted. In the days and weeks that follow the finalist presentations, the selection committee makes its recommendation, and a plan provider is named.
What does it all mean?
In a competitive employment climate, attracting and retaining the best employees means explaining the benefits of a career in public service, and those benefits include a secure retirement plan. As employees change jobs they may ignore the issue of retirement planning entirely or assume there will be no changes from what they knew of private sector plans. However, because of their broader representation and strict selection process regulation, retirement benefits look a little different on the government side of the fence. The public sector’s ability to explain the system will keep its employees informed and educated and ensure them a workable plan.