CPFO Exam - Risk, Benefits, Procurement How many full -time public employees are covered by defined benefit plans? - ✔✔ Ninety -one percent How many full -time public employees are covered by defined contribution plans? - ✔✔ nine percent Prudent -Person Rule - ✔✔ Requires each retirement board member to perform his or her duties as a prudent person would when acting in a like capacity and in a similar situation. Defined Benefit Plan - ✔✔ Provides for a guaranteed benefit at retirement using a formula generally based on age, length of service and salary. Defined Contribution Plan - ✔✔ Provides for benefits based on the assets available in employees' individual accounts. Defined Benefit Plan - Employer Perspective - ✔✔ "Funding Certainty: Liabi lities change based on actuarial assumptions regarding future salary increases, investment earnings, employee turnover and plan experience. Predictable Costs: Annual contributions can vary from year to year based upon actuarial assumptions. Many plans are funded based on a consistent rate of contribution set by statute. Recruitment Tool: Typically not portable between employers, unless under same umbrella system (e.g. WRS). Reward Long -service Employees: Benefits typically based on final year(s) salary. Adm inistrative Expenses: Include actuarial valuation, record keeping and investment management. Investment Risk: Assumed by the employer." Defined Benefit Plan - Employee Perspective - ✔✔ "Benefit Potential: Benefits paid at retirement are for life and are gu aranteed by the plan's formula. COLAs are common. Understanding benefits: Require explanation as they are based on a set of variables. Typically, there are no separate accounts. Access to Assets while Employed: Benefits may not be withdrawn while actively employed. Reward long -service Employees: Based on final year(s) salary. Recruitment Tool: Benefits have limited portability Investment Risk: Risk is assumed by the employer." Defined Contribution Plan - Employer Perspective - ✔✔ Funding Certainty: Employer liability is fulfilled annually as contributions are made to employee accounts typically based on a percentage of payroll. Predictable Costs: Annual cash expenditures are more predictable as they are based on a set percentage of employee salaries. Recruit ment tool: benefits are portable Reward long service: Benefits are based upon accumulated contributions and earnings Admin Expenses: Lower, as no actuarial valuation is necessary. Employee education costs and recordkeeping may be higher. Investment Risk: A ssumbed by the employee." Defined Contribution Plan - Employee Perspective - ✔✔ "Benefit Potential: Based on contributions and earnings. The final retirement benefit can be eroded by pre -retirement distributions and inflation. Understanding benefits: Benef its based on a percentage of salary. No other variables need to be considered. Each individual has a separate account. Access to Assets while Employed: Benefits may be withdrawn under certain circumstances (e.g. loans, death, or disability) per IRS guideli nes. Rewards long -
service employees: Not really, based on accumulated earnings and contributions." Retirement plan funding objectives - ✔✔ 1. Maintain stable contribution rates 2. eliminate the unfunded accrued liability wihtin a certain time frame 3. Main tain inter -generational equity by not passing current costs on to future generations 4. Utilize techniques to hedge against unexpected adverse experience. Retirement plan funding methods - ✔✔ Level: produce contribution rates based on an even percentage of payroll. Graduated: funds benefits by increasing the percentage of payroll contribution over an individual's career. Unfunded Accrued Liability (UAL) - ✔✔ The excess of the total liabilities, both present and prospective, over the present assets and prese nt value of future normal costs. Closed Amortization - ✔✔ Financing the UAL over a specific number of years with the number of years declining as each year passes. Open Amortization - ✔✔ Number of years to pay off the UAL may remain constant from year -to-year. Three methods of valuing assets - ✔✔ 1. Book Value: Represents the cumulative actual cost of acquiring the assets. 2. Market Value: Values the assets at their sale price, producing the fluctuation in asset values. 3. Smoothed Market Value: Recognize o nly a portion (i.e. 20%) of the unrealized gains and
service employees: Not really, based on accumulated earnings and contributions." Retirement plan funding objectives - ✔✔ 1. Maintain stable contribution rates 2. eliminate the unfunded accrued liability wihtin a certain time frame 3. Main tain inter -generational equity by not passing current costs on to future generations 4. Utilize techniques to hedge against unexpected adverse experience. Retirement plan funding methods - ✔✔ Level: produce contribution rates based on an even percentage of payroll. Graduated: funds benefits by increasing the percentage of payroll contribution over an individual's career. Unfunded Accrued Liability (UAL) - ✔✔ The excess of the total liabilities, both present and prospective, over the present assets and prese nt value of future normal costs. Closed Amortization - ✔✔ Financing the UAL over a specific number of years with the number of years declining as each year passes. Open Amortization - ✔✔ Number of years to pay off the UAL may remain constant from year -to-year. Three methods of valuing assets - ✔✔ 1. Book Value: Represents the cumulative actual cost of acquiring the assets. 2. Market Value: Values the assets at their sale price, producing the fluctuation in asset values. 3. Smoothed Market Value: Recognize o nly a portion (i.e. 20%) of the unrealized gains and
