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Exh 8B!,-, ~_ _. AGENDA ITEM #8B ,,,o, SEPTEMBER 9, 2002 ~,, CITY OF ATLANTIC BEACH CITY COMMISSIONER MEETING STAFF REPORT _ ,; ACTION REQUESTED: Authorize Ordinance to be prepared for City Commission approval '""" implementing a Deferred Retirement Option Plan (DROP) for the General Employee and Police Officer pension plans. '~"~"" SUBMITTED BY: George Foster, Pension Plan Administrator DATE: September 3, 2002 ~^ BACKGROUND: Both the General Employee and Police Officer pension boards are recommending the addition of a five-year self-directed cost neutral. ~" Deferred Retirement Option Plan (DROP) to the current City's pension plans. ~ A DROP allows employees to retire and receive their retirement annuity while still working for the City. During the period of the ~ DROP, their retirement annuity is deposited into an investment ~ ;.:;account. After the DROP period (five years), the employee must ' retire. At that time, the cash value of their investment account may ,., be withdrawn as a lump sum amount or as otherwise directed by the employee. Additionally, the employee begins to directly receive their retirement annuity. ,. `Once the employee enters the DROP, their retirement annuity is ' determined and does not change based upon additional service ,~.~. with the City or salary increases. Both the employee and City contributions to the City's pension plan are discontinued. ~± FUNDING: The proposed DROP is cost neutral with an actuarial reduction to benefits for those employees that elect to enter the DROP prior to ' reaching normal retirement eligibility. ,. ^~ ' RECOMMENDATION: That the City Commission authorize staff to prepare an Ordinance for their approval changing the City Code to include a DROP Plan. ~, ATTACHMENT: 1. Advantages /Disadvantages 2. Questions and Answers. ~, CITY MANAGER: ~.a ~; r~ AGENDA ITEM #8B SEPTEMBER 9, 2002 r.^ ~' DROP PLAN ADVANTAGES /DISADVANTAGES ~"' THE EMPLOYEE .... - Employees may build substantial cash which, when added to their monthly pension, may ~`"' increase their total retirement benefits. - - Employees can tailor their investment program in the DROP according to their personal ~„ risk tolerance and financial situation. - Employees may receive a lump sum distribution option which may assist employees pay ~' off major debt prior to retirement. - Employees maybe able to pass all or a part of their account to their heirs. `` '' - Employee's monthly pension, after finally retiring, will be less than it would have been ~,,,, had the employee not chosen the DROP. - Employees must weigh the lump-.sum that a DROP offers against consequences of „~, participating, including giving up increases in monthly pension that may have resulted from future service and pay hikes. ,.~ ,; THE EMPLOYER ... . - May encourage employees who are considering early retirement to continue working, .~., thereby retaining experienced employees. ~,~ ~..; - May result in employees staying at work longer, thus deferring hiring of new employees .~ and promotions. - May increase/decrease costs as higher paid employees stay on the job longer. However : Employer contributions to the pension plan cease upon the employee entering into a i DROP. - Popularity of DROPS may help in recruitment and retention. @f ~., ,:; AGENDA ITEM #8B ~„~ SEPTEMBER 9, 2002 '~ DROP PLAN p .~. .. ~~ n QUESTIONS AND ANSWERS What is a DROP ? A. A DROP is a distribution option within a traditional defined benefit pension plan.. It is not a separate qualified retirement plan. ~, r How does an Employer add a DROP ? ~~", A. Employers must amend their pension Plan Document (Ordinance) to add a DROP. The amendment specifies the operating provision of the DROP program. °~ How does a DROP work ? A. Once an employee is eligible, they have an option to enter a DROP or continue within the ~' City's Defined Benefit Plan. If they elect to enter the DROP, their monthly pension ~ ' amount would be placed into a separate "self directed" DROP account. The employee no ,~, longer accrues benefits in the Defined Benefit Plan, although they may continue to work for the City during the DROP period (5 years) and save for retirement through the DROP account.- ,~, ` ' If an employee can accrue larger retirement benefits by accumulating more years of service in ' ' .the Pension Plan, why would they want to enter the DROP ? ,,., A. DROP accounts provide a lump sum account balance over which the employee has wide ' flexibility in taking distributions and complete freedom in passing the remaining portion ,.,~ of the DROP account to his/her heirs. What about disability and death coverage while an employee participates in the DROP ? n `, A. Once an employee enters a DROP, they have officially retired, that is, no disability or pre-retirement death coverage is available through he City's Defined Benefit Plana .~ Employees would still be eligible for employee life insurance and any survivor benefits selected at the time of retirement. What happens to contributions to the pension plan trust when an employee enters the DROP ? ~; _ A. Both the Employer and Employee contributions cease. Employees may contribute, on a voluntary basis, to the City's ICMA 457 Plan. ~- ` ` AGENDA ITEM #8B ,.,, SEPTEMBER 9, 2002 """' May employees self-contribute to their DROP account F' i :. A. No; however, employees that enter a DROP may contribute to the City's ICMA 457 Plan. Do DROP participants benefit from retiree pay adjustments ? ~' A. DROP, participants are entitled to the same pay adjustments as other retirees receive. This applies to both payments during the DROP period and payments after. ~. Must a participant actually retire at the end ~of the DROP period ? _ ,,,,, A. Yes. Even employees that may be promoted must retire at the end of their DROP period. Can a participant retire before the end of the DROP period ..-, A. Yes. A DROP participant may retire at any time before the specified period. DROP ` payments would continue as monthly pension payments and the participant would be ,., entitled to their entire balance within their DROP account. r _ - What distribution options are available at the end of DROP participation ? ,,..~ ' A. Usually there are the same as defined contribution plan: lump sum, periodic withdrawal, ` purchase of an annuity, rollover to an IR.A, delayed deferral, etc., or any combination of these. t, How are DROP payments invested ? x: ~; ; A. Employee DROP payments will be self-directed with the money actually transferred from the pension plan to a separate account for the participant. The participant chooses how r^+ they want the assets invested from an array of options .offered. . , _ ,_ What happens if the Pension Plan benefit is increased, or decreased, while an employee is "' participating in the DROP ? ~: A. Unless the change is retroactive, the participant would not be affected from any changes. .~, €: ~ ;' Is an employee covered under Social Security once they enter a DROP ? ~' A. _Yes ~; Can an employee "change their mind" and opt out of a DROP at a later date ? t_ A. No. ~, ~.