What Works in Retirement Plan Design: Participation, Perspective, and Process
Link, Jim, Government Finance Review
When faced with the unenviable job of reducing the cost of retirement benefits, governing bodies sometimes start out by asking how much could be saved by a switching from a defined benefit to a defined contribution plan, or by directing the jurisdiction to increase employee contributions and freeze COLAs. Many of these questions are well worth asking, but this type of approach can focus too narrowly on the short-term financial impacts of retirement redesign. The review process produces the most successful outcome when decision makers focus on the long-term sustainability of the plan; the affordability of the plan's annual cost in the context of broader budget imperatives; and the sufficiency, security, and competitiveness of the benefit being provided to retirees.
The primary question government officials want answered is what works in retirement plan design, or what is the best retirement plan design for income replacement, other postemployment benefits, or leave bank policies. But, as there is no one best form of government or one best form of taxation, there is no one best retirement plan design. "The best" depends entirely on the specific circumstances of the plan sponsor, the plan sponsor's goals, and its employment needs.
THE CASE FOR A REVIEW
When considering changes to the jurisdiction's retirement benefits, finance officers are often lobbied by a wide variety of stakeholders, each with a different idea about the best plan design or reform. There is usually a group that wants to minimize any potential reduction in benefits. Another group will sing the praises of 401(k) plans and risk sharing, and a third group will challenge the fairness of diverting resources away from other governmental services to fund the retirement plans at all.
Finance officers need a well-designed process that considers the wide variety of challenges facing their jurisdictions, incorporates groups with opposing views, and strives to provide answers for critics and questioners fro-mall sides. Including stakeholders from groups with opposing views can slow down the process, but integrating opposing views can create the most powerful result.
Taking your time and establishing a thoughtful process will allow your organization to find not just an answer, but the right answer.
The review should incorporate organizational and human capital factors, rather than solely financial goals, with input from an interdisciplinary review team. Such a process would include setting or reviewing financial and compensation goals, assessing the impact on recruitment and retention, evaluating retirement security and intergenerational equity concerns, and understanding the plan's financial position. Governments should also consider the type of benefits being offered and the legal basis for modifying them. Other areas that need attention are coordinating communication and input from stakeholders; developing and evaluating options for plan design, including price; and considering often overlooked elements of plan design such as the impact of business and economic cycles, and using economic inputs to stress test results. A thorough review that considers these elements allows finance officers to answer the key questions about the long-term fiscal health of the jurisdiction's retirement benefit.
PARTICIPATION--BUILDING THE RIGHT TEAM
Each of the above steps is important, but developing a multi-dimensional review team is the finance officer's first opportunity to build consensus for the ultimate recommendation. Avoid any impulse to name a team dominated by finance or like-minded colleagues. Build a balanced team that can have reasonable and rational discussions, including members of the organization and plan administration teams, human resources, and the legal department, in addition to the accounting and finance team members. Also, consider other constituencies that should be represented; for instance, the oversight committees or boards for the benefits plans under review, information technology staff, and leadership from key employee groups. …