Preparing Employees for Retirement: The Role of Individualized On-Line Investment Advice

By Schwarz, Brennan | Government Finance Review, October 2000 | Go to article overview

Preparing Employees for Retirement: The Role of Individualized On-Line Investment Advice


Schwarz, Brennan, Government Finance Review


As the public-sector workforce ages, retirement planning and education will take a more prominent role in overall pension administration. The leading edge of the baby boomers will turn 60 in 2006. This demographic shift--coupled with the growing employee appetite for retirement and investment information and the ongoing shift in pension designs -- will make retirement planning a key task for government finance officers. This article will review the pension design changes, legal issues, and provide brief case studies of retirement planning and education to assist finance officers in "fine tuning" their own retirement education initiatives.

Background

In recent years, state and local governments have experimented with the standard retirement package. Although the core benefit remains a defined benefit plan, many have supplemented them with DROP plans and deferred compensation (457) plans, both of which require more involvement by employees. Traditionally, pension plans covering public employees were structured as defined benefit plans. While a handful of public pension systems have converted to defined contribution pension systems, or have implemented a hybrid of the two structures, the overwhelming majority of public employees are still covered by defined benefit plans.

The 2000 Survey of State and Local Government Retirement Systems conducted by the Public Pension Coordinating Council found that 91 percent of pension systems in the United States are defined benefit, 4 percent are defined contribution, and 5 percent of retirement systems maintain a hybrid of defined contribution and defined benefit.

Meeting the informational needs of employees will vary depending on whether a retirement system offers defined contribution or a defined benefit pension. Because retirement benefits are less certain than in a defined benefit plan, defined contribution plans require participants and sponsors to take a more active role in retirement planning and education.

Legal Issues

The GFOA publication, Legal Obligations of Public Pension Plan Governing Boards and Administrators, notes that "Whether required by law or not, good fiduciary practice and good public policy require that plan governing boards and administrators provide regular and substantial information flow to plan members and their governmental employers in order to facilitate the creation or maintenance of a knowledgeable plan membership, to allow for appropriate member scrutiny and to assist governmental employers in their financial reporting and disclosures."

The growing recognition of the unique relationship between plan participants and the individuals charged with operating and administrating the pension system or fund has led to a body of regulation meant to protect the interests of employees. In the private sector, the Employee Retirement Income Security Act of 1974 (ERISA) governs the administration of retirement benefits. The provisions governing private plan sponsors related to the event of mismanagement, neglect, negligence, fraud, theft, or embezzlement fall under the title of fiduciary responsibility. While the public sector is not legally obligated to comply with the provisions of ERISA, the principles of fiduciary responsibility influence pension fund administration in the public sector. A pension plan may not have a direct legal obligation to provide members with benefit counseling and education, [1] but plan administrators clearly have an obligation to provide basic information on the benefit plan to plan members. Indeed the Code of Federal Regulat ions states that plan participants must be able to "make informed decisions about investment alternatives, such as the risks, returns, and fees of the alternatives (29 CFR Chapter 25, section 2550.404c-1).

However, the GFOA publication, Legal Obligations of Public Pension Plan Governing Boards and Administrators, warns that, "If benefit counseling beyond information provision is undertaken by the pension plan administration, . …

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