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City of Fresno’s Deferred Retirement Option Program “DROP”

City of Fresno’s Deferred Retirement Option Program “DROP” . Presenters. Stanley McDivitt, CPA Retirement Administrator Yvonne Arellano Retirement Benefits Manager. What is your City Pension.

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City of Fresno’s Deferred Retirement Option Program “DROP”

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  1. City of Fresno’s Deferred Retirement Option Program “DROP”

  2. Presenters • Stanley McDivitt, CPA • Retirement Administrator • Yvonne Arellano • Retirement Benefits Manager

  3. What is your City Pension • You are in a Defined Benefit Plan (“DB”) vs a Defined Contribution Plan (“DC”) which is now becoming more common in Corporate Retirement Plans. • You and the City make contributions over your career, the money is invested by the System and then the System will pay you a pension benefit for life with a spousal continuance based on a defined formula.

  4. What is the Benefit Formula • 2% of Final Average Salary (defined as highest three consecutive year average at current pay level), times years of service, not to exceed 25 years, plus: • 1% of Final Average Salary, times years of service in excess of 25 years. • Plus age table factor after age 55

  5. DROP PLANS • There are many DROP programs across the country and every DROP program is different! • Many DROP programs are NOT cost neutral and have created political issues. • In California DROP programs also exist in San Diego, LA Fire & Police and now San Francisco has recently approved a 3 year DROP.

  6. OUR DROP HISTORY • Our DROP Program was developed on the basis that if we could design a DROP with a cost neutral approach, it would eliminate any political questions and concerns. • Labor Associations added language in MOUs to study a DROP program. • With Actuarial Reports and Legal opinions, the Boards were able to obtain the necessary support of the City Council to implement our DROP Programs. • Our DROP Programs began January 1, 1998 • It is a Forward DROP with a maximum participation period up to 10 years

  7. Deferred Retirement Option Program (“DROP”) • What is the City’s DROP Program? • It is voluntary program and is simply an alternative method of receiving a portion of your retirement benefits. • Minimum requirements for eligibility include age 50 with a minimum of 5 years of service. (Employees System members can enter DROP between ages 50-55 after an actuarial cost neutral adjustment).

  8. The Benefits of DROP • For the employee: • Provides alternative distribution options such as lump sum, annuity or roll over to an IRA. • Ownership of DROP account. The member owns the balance of the account and it will go to his/her beneficiary or estate upon death. • The power of compound interest earnings in the DROP account. • Tax deferred benefit of DROP account to participant. • Cease employee contributions to the System.

  9. Why would you enter the DROP? • To gain ownership of your DROP account. • For access to the flexible DROP Distribution options. • To participate in the actual investment returns of the System. • Interest is credited monthly to your DROP account using the Systems actual 5 year average investment return minus investment expenses (currently 11.89%, but has been as low as 2.81%). • Your DROP deposit amount is increased annually based on the amount of the retiree cost of living increase.

  10. What Happens at Retirement? • At retirement, the member will receive: • A monthly benefit for life based on service and salary up to the start of the DROP participation date (adjusted annually by applicable COLA’s) • Plus your DROP account distribution option: • lump sum; • up to a joint life annuity (No future cost of living increases); • roll-over to IRA account or • any combination of the three distribution options.

  11. Sample DROP Calculation 1 • Assume an Employees System member has 25years of service and his or her retirement benefit is $1,875 per month ($22,500 annual) as of the election to enter DROP ($3,750 monthly salary * 50% (25 years * 2.0)=$1,875). • Assume that the member stays in DROP for 5years and then decides to retire. • Assume that interest is credited at 8.5% over the 60 months in DROP and COLA equals 3%per year. • Assume that the member elects to payout his or her DROP account over 240 months.

  12. Sample DROP Calculation 1 • DROP account balance after 5 years = $147,289 • Base retirement begins at $2,110.33 (amount of last deposit to DROP account) plus future COLA increases (started deposits at $1,875.00). • Monthly DROP payout would be $1,227.73 for 240 months (20 years). ($1,227.73 * 240=$294,656) • Pension + DROP starts at $3,338.06 monthly ($2,110.33+$1,227.73) or $40,056.72 annually. • If the individual lives to age 85, the pension and DROP payments would total $1,300,261.03

  13. Sample DROP Calculation 2 • Assume an Employees System member has 25years of service and his or her retirement benefit is $2,600 per month as of the election to enter DROP ($5,200 monthly salary ($62,400 annual) * 50% (25 years * 2.0)=$2,600). • Assume that the member stays in DROP for 5years and then decides to retire. • Assume that interest is credited at 8.5% over the 60 months in DROP and COLA equals 3%per year. • Assume that the member elects to payout his or her DROP account over 240 months.

  14. Sample DROP Calculation 2 • DROP account balance after 5 years = $204,241 • Base retirement begins at $2,926.32 (amount of last deposit to DROP account) plus future COLA increases. • Monthly DROP payout would be $1,702.46 for 240 months (20 years). ($1,702.46 * 240=$408,590.11) • Pension + DROP starts at $4,628.78 monthly ($2,926.32+1,702.46) or $55,545.36 annually. • If the individual lives to age 85, the pension and DROP payments would total $1,803,028.63

  15. Plan ahead for your Retirement! • If you enter DROP, you are agreeing to retire from the City after 10 years in the DROP Program and start distribution of your DROP account along with your pension. • Age table factor after age 55 will increase your service credits by from 2 to 3 percent per year if less than 25 years of service. • Your retirement plan should consider issues such as how will you pay for your health care costs.

  16. COST OF LIVING ADJUSTMENTS DURING DROP • Will you receive cost of living increases while you are in the DROP program? • Yes, your monthly deposit into your DROP account will be increased annually by the COLA amount retirees receive during your DROP participation.

  17. WHAT ARE THE ADVANTAGES OF A DROP? • For the employer: • allows employer to retain experienced personnel • defers the cost of hiring and training replacements • recruitment tool, enhances long term benefit to potential candidates without additional expense for the employer • reduced sick time, increased morale of employees, re-invigorates senior employees

  18. WHAT ARE THE ADVANTAGES OF A DROP? • For the employee: • Provides alternative distribution options such as lump sum, annuity or roll over to IRA options. • Ownership of DROP account. The member owns the balance of the account and it will go to his/her beneficiary or estate upon death. • The power of compound interest earnings in the DROP account. • Tax benefit of DROP account to participant.

  19. DISADVANTAGES OF A DROP? • For the employee: • The member’s retirement benefit does not reflect service and salary increases while a participant in the DROP. • Delays promotional opportunities for other employees. • The decision to enter DROP is irrevocable.

  20. DROP NEUTRALITY • Cost Neutrality of the Fresno DROP Programs? • Our actuary has determined that the DROP programs are cost neutral and have added to the surplus of the Systems.

  21. SUMMARY OF PAST DROP EXPERIENCES • Past Experiences • Length of participation in DROP Program? • Currently 4.5 years, and average could increase to approximately 5 years. • Most employees have selected the annuity distribution option with interest credited at the Systems assumed investment return (currently at 8.25%).

  22. CONSIDERATIONS • Considerations and Concerns • Working additional years for the City in the DROP program may have an impact on the life expectancy of retirees. • With additional years of service at an older age, comes the additional risk of disability during DROP which could also impact the quality of life in retirement.

  23. For Assistance • For DROP counseling appointments, call (559) 621-7080 to schedule an appointment with a Retirement Benefits Counselor. • Our Website CFRS-CA.ORG has DROP Calculators, employee handbooks, frequently asked questions and much more.

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