DC Plans Evolving in the Public Sector

A proposed summary of recommended core defined contribution plan components based on research and responses from the people interviewed for the report includes: 

• Employee contributions are mandatory and begin immediately. A state or local government may want to have a brief waiting period (less than three months) before starting contributions due to turnover. 
• Total contribution level is 12% to 15% with Social Security and 18% to 20% without Social Security. 
• The employer contributes half or approximately the amount contributed to the defined benefit plan for employees. 
• Employee contributions are set at the full amount immediately so that auto-escalation is not needed. 
• Contributions are defaulted into a target-date fund.  
• A 10 to 15 fund menu is offered (excluding target-date funds) and includes all major asset classes and varying levels of risk. 
• A limited brokerage window is allowed for employee contributions only. A minimum balance must be kept in the main account. 
• There is one recordkeeper. 
• Loans from employee contributions are allowed only for hardships and at the discretion of the employer. No loans are available from the employer portion. A dollar limit on the amount of loan may also be appropriate. 
• Vesting in employer contributions is one year or less. 
• An option to annuitize part or all of the fund balance is allowed at or near retirement and/or offer a deferred annuity investment option. 
• Availability of plan-sponsored, objective retirement counseling and education to help employees make informed retirement (versus investing) decisions. 

The report points out that investment portfolio and recordkeeper selection are extremely important fiduciary roles for plan sponsors and can have serious financial affect on participants. Considerations are discussed.  

Rebecca Moore
editors@plansponsor.com