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Moderator: Kurt Weber, State of New Mexico Panelists: Jamie Ohl, The Hartford Bill Heydt, Nationwide Retirement Solutions. Retirement Plan Advantages A Comparison of DB and DC Plans. Retirement Plan Advantages A Comparison of DB and DC Plans. Jamie Ohl Vice President, The Hartford.

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retirement plan advantages a comparison of db and dc plans
Moderator:

Kurt Weber, State of New Mexico

Panelists:

Jamie Ohl, The Hartford

Bill Heydt, Nationwide Retirement Solutions

Retirement Plan AdvantagesA Comparison of DB and DC Plans
retirement plan advantages
Defined Benefit

More income for career employees

Easily understood benefit

Guaranteed lifetime income

Defined Contribution

More income for non-career employees

Easily determined contribution

Guaranteed account balance

Retirement Plan Advantages
slide4

Considerations

1. Living longer than expected in retirement

Longevity data presented does not reflect mortality from birth statistics available from U.S. Census Bureau.

NOT FOR USE WITH THE PUBLIC

slide5

Considerations

2. Rate of withdrawal

Hypothetical initial value of

$500,000 invested 12/31/ 1972. Portfolio:

50% large-company stocks,

50% intermediate-term bonds.

Assumes reinvestment of income and

no transaction costs or taxes.

11 Years

10%

13 Years

9%

15 Years

8%

Withdrawal Rate

18 Years

7%

21 Years

6%

27 Years

5%

33 Years

4%

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS

Data source: Ned Davis Research, 1/06.

Stocks—Standard & Poor’s 500®, The S&P 500 Index is an unmanaged list of 500 widely held U.S. common stocks frequently used a measure of U.S. stock market performance; Intermediate-term Bonds— Lehman Brothers Aggregate Bond Index which is an unmanaged group of securities and is considered to be representative of the bond market in general. The above indices are unmanaged and unavailable for direct investment.

NOT FOR USE WITH THE PUBLIC

slide6

Considerations

: hypothetical 5.1% average annual return

Data Source: Hartford Internal Research

retirement plan advantages1
Defined Benefit

Automatic inflation protection during career

May provide inflation protection during retirement

Internal rate of return on investments is higher

Defined Contribution

Account balances are portable

Cost of administration is generally less than for a defined benefit plan

Opportunity for higher benefits

Retirement Plan Advantages
slide8

Considerations

3. Inflation

1940s

1950s

1970s

1960s

NOT FOR USE WITH THE PUBLIC

slide9

Considerations

4. Lower average returns on DC assets…

slide11

Considerations

5. Traditional sources of retirement income may not be available

Social Security

(AP)WASHINGTON The trust fund for Social Security will be depleted in 2040, a year before expected, and Medicare will exhaust its trust fund reserves just 12 years from now, . . . the country [is facing] a "looming fiscal crisis as the baby boom generation moves into retirement." trustees for the programs said Monday.

Treasury Secretary John Snow

Source: cbs3.com,Social Security, Medicare Trust Funds Sink, May 1, 2006

NOT FOR USE WITH THE PUBLIC

retirement plan disadvantages a comparison of db and dc plans

Retirement Plan DisadvantagesA Comparison of DB and DC Plans

Bill Heydt

Vice President

Nationwide Retirement Solutions

employer perspective disadvantages costs
Defined Benefit

Employer assumes all risk

Actuarial

Investment

Market Volatility

Political pressure to lower costs

Defined Contribution

Employer may contribute to two plans: DB for current employees and DC for new hires

Negotiation of labor agreements may result in higher wages

Separate funding of disability benefits

Employer PerspectiveDisadvantages - Costs
employer perspective disadvantages other considerations
Defined Benefit

Benefit formulas set by state statute and are difficult to change

Complex communication and administration

Employees retire early, as soon as benefits max out

Defined Contribution

Employee benefits are not guaranteed

Insufficient asset accumulation may result in older workforce

Investment education and guidance must be provided

Employer PerspectiveDisadvantages – Other Considerations
employee perspective disadvantages control
Defined Benefit

Employer responsible for all investment decisions

Limited choice for distributions, with little or no portability options

Defined Contribution

Employees bear full investment risk and are responsible for all decisions

Current investment decisions are generally too conservative

Employee PerspectiveDisadvantages - Control
employee perspective disadvantages other considerations
Defined Benefit

Short-term employees receive little value

Value of benefit not always understood

Rules can be complicated and varied by employment status, hire date

Defined Contribution

If accumulations not sufficient, retirement date may be delayed

Retirement income is not guaranteed

Investment decisions can be confusing

Employee PerspectiveDisadvantages – Other Considerations
thank you
Questions?

Experiences?

Examples?

Thank You!