Benefits December 16, 2014

Governments Likely to Focus on Reducing OPEB Costs

State and local governments, overall, face significant costs for post-retirement benefits.
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In 2014, 61% of state and local government human resource executives responding to a national workforce survey answered that they had made changes to retiree health benefits over the past year, up from 45% in 2011, according to a report from the Center for State and Local Government Excellence.

Fourteen percent of respondents shifted health care costs from the employer to retirees, 8% set funds aside to cover future retiree health costs, and 1% eliminated retiree health care benefits altogether.

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For fiscal year 2013, state other postemployment benefits (OPEB) unfunded actuarial accrued liabilities (UAAL) were nearly $498 billion. The Center notes that the size of a state’s unfunded OPEB liability is a function of its funding strategy, the generosity of the benefit, and demographics.

The median average state OPEB UAAL is $2 billion, and the mean average is $10 billion. However, the aggregate state OPEB UAAL is nearly half of one-trillion dollars, and more than 75% of the total is carried by the top ten states.

The Center found disparity in the funding discipline for state OPEB benefits, as measured by the annual required contribution (ARC). The average percentage of the OPEB ARC contributed by states for the fiscal year 2013 period was 55%. However, the weighted average amount contributed was lower, at approximately 46%. The states with larger UAALs and ARC requirements were among the lowest contributors.

Prior published reviews of state OPEB finances have identified a growing number of states who have elected to set aside assets to prefund retiree health benefits, the Center noted. For fiscal years 2009 through 2011, 18 states reported holding OPEB assets; for the 2012 fiscal year, the number of states grew to 25. For 2013, 33 states held approximately $33 billion in OPEB assets.

However, the Center says that, given the size of the unfunded OPEB liability in some states, it is likely that state governments will continue to address these issues by reforming benefits or taking other actions. The Center’s report notes that legal protections for OPEB benefits are lower than protections for pension benefits, although this is not the case in every state. The Center pointed out that in July, the Illinois Supreme Court ruled that the state constitution prevents the reduction of health care benefits for retired employees.

States may have other means of cutting OPEB costs outside of the legislative process, the Center suggests—public health insurance exchanges. While this practice has yet to be adopted by any state governments, some local governments, including Detroit, as of March 1, 2014, and Chicago, as part of a phased approach which will conclude by 2016, are taking advantage of the exchanges as an alternative means of providing health care to their pre-Medicare eligible retirees.

The Center’s report is here.

Participants December 16, 2014

Participants Acknowledge Investing Ignorance

Most employees participate when offered access to a defined contribution retirement plan, but a strong majority also cite worries and ignorance about tough investing topics.
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A new blog post in the LIMRA Industry Trends series argues there is a lot to like about the fact that 401(k) plans have become Americans’ chief retirement savings vehicle, but major challenges remain.

LIMRA points specifically to employer matching contributions, tax breaks, loan availability, and the convenience of automatic paycheck deferrals as the main reasons why 401(k)s work well for workplace retirement savers. The claims are based on a new LIMRA Secure Retirement Institute consumer survey exploring the use of defined contribution (DC) and defined benefit (DB) plans in the workplace—paying special attention to issues such as employee participation, attitudes, risk tolerance and knowledge.

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LIMRA says the survey shows 79% participation for eligible private-sector employees offered a DC plan at work—up two percentage points from 2013. Eighty percent of public-sector employees eligible for a DC plan choose to participate, LIMRA says, up from 79% a year earlier. 

The research also finds a continued decline of DB plans offered in the private sector. In 2014, just 16% of employers offered a defined benefit pension. Notably, more than 40% of employees eligible for DC plans at work are also saving for retirement outside of work, LIMRA finds.

While DC participation rates remain high, not all findings from the survey are positive. For example, employees acknowledge they’re not as informed about investing and finances as they would like to be. In the public sector, LIMRA notes only 7% of workplace retirement investors feel very knowledgeable about their investments. Investing prowess is nearly as rare in the private sector, with 12% of investors feeling very confident in their financial knowledge.

LIMRA says many employees recognize that financial services professionals provide a valuable service. More than half of public-sector employees, and about half of private-sector employees, agree or strongly agree that financial advisers provide performance potential beyond what an individual can achieve alone.

This means there is significant opportunity for financial professionals to have conversations with employees who aren’t as aware of money matters as they’d like to be, LIMRA concludes.

LIMRA has also published the survey findings in two infographics, one for the private sector and one for the not-for-profit sector. Sample sizes and demographic breakdowns are also provided.

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