Legislature(2017 - 2018)ADAMS ROOM 519
04/09/2018 01:30 PM FINANCE
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HOUSE BILL NO. 306 "An Act relating to disbursement options under the Public Employees' Retirement System of Alaska and the Teachers' Retirement System of Alaska for participants in the defined contribution plan; and providing for an effective date." 4:12:15 PM Representative Wilson asked if there was a legal opinion about why there was not an actuarial on the bill. She could not find one in the back-up documents. SYLVAN ROBB, DEPUTY DIRECTOR, DEPARTMENT OF ADMINISTRATION, introduced herself. She indicated Commissioner Ridle was not available. KATHY MS. LEA, CHIEF PENSION OFFICER, DIVISION OF RETIREMENT AND BENEFITS, DEPARTMENT OF ADMINISTRATION, answered that there was only a requirement for an actuarial analysis if there was an impact to the funds. HB 306 had no financial impact to the funds. Representative Wilson remarked that she did not understand the bill. Ms. Robb relayed that currently the disbursement options for PERS Tier IV and TRS Tier III were contained in statute. She reported that the bill moved the disbursement from statute to regulation. Currently, any changes the department would like to make in order to modernize the disbursement options or to meet new Internal Revenue Service (IRS) regulations required a statutory change. The bill would allow the division to be nimbler and to offer better services to state retirees. She added that there were vested employees in the two tiers that were impacted that were starting to retire. Moving the disbursement options from statute to regulation would offer the same flexibility the state currently had for the SBS and the deferred compensation plans. It still provided significant transparency for the public. The discussion of new disbursement options would be covered at ARM Board meetings that were done in a public forum and again once the recommendations were done by the ARM Board before going to regulation. There was a public comment period at regulation as well. The ARM Board had unanimous approval for the change proposed in the bill. Co-Chair Seaton understood that under Tier III and Tier IV TRS they were separate accounts that were accounted for. The bill only had to do with the disbursement of an individual's money. It would not impact the fund because the money was held for particular individuals. He wondered if he was correct. Ms. Lea confirmed Co-Chair Seaton was correct. She elaborated that she was talking about the disbursement of an employee's contribution account comprised of their contributions, the employer's contributions made during employment, and any gains or losses on the fund. 4:16:12 PM Representative Wilson was trying to figure out the problem with disbursement. Ms. Lea answered that currently the state offered a lump sum disbursement, a periodic payment of twice per year, and different annuity options (lifetime, joint survivor, and various period-certain annuities). The ARM Board was considering some newer products that were on the market that mimicked a guaranteed income. One of them was called a qualified longevity annuity contract, which allowed an employee to postpose any disbursements from a portion of an employee's account until they reached 80 or 82 years of age. The option was designed to do two things: It removed that portion of an employee's account from the required minimum distribution that currently occurred when an employee reached 72 years of age. It also protected against longevity risk. If a person was running out of money, they would have a pot of money to draw on later. Ms. Lea continued that another disbursement option, a guaranteed lifetime withdrawal, which provided an insurance wrapper around the amount in an employee's account. A person would typically enroll in the option anytime 10 years before retirement or up to retirement. They would not enroll before that time. During the time a person was enrolled in the program they would pay an insurance premium. The employee's monthly benefit would be based on whatever the highest balance was at the end of the term (when a person was past retirement and even when the state was paying out benefits). It protected the individual from the downside of investments but allowed them to have the upside. Representative Guttenberg had been reading more about his investments. He suggested that there was a plethora of different payout options. He liked the idea of having additional options. He thought that having the options in statute made it difficult for the ARM Board to offer other options. Representative Pruitt asked if there was not a risk to the state. He wondered if there were risks for the participants. He asked about the disbursement of funds if an employee died. He asked for clarification. Ms. Lea responded that the change was simple. The division was not looking to change any of the options for disbursement currently available. The ARM Board was looking at adding options that would benefit participants. The state was required by the IRS to fully disclose all fees and conditions on any of the disbursement products. In terms of his question regarding survivors, the options under review were those that would provide full survivor benefits to participants should they die before they exhausted their funds. 4:21:58 PM Co-Chair Foster OPENED and CLOSED public testimony for HB 306. Co-Chair Foster asked to review the fiscal notes. Representative Wilson wanted to wait until the following meeting before moving the bill, as she needed a better understanding of the bill. Co-Chair Foster wanted to make sure members were comfortable with the bill. Representative Guttenberg provided a hypothetical scenario. If his pension annuity paid out $1000 per month until he was 92, but he lived to be 125, and he bought the lifetime guarantee which paid him $750 per month, he wondered if the state would take the other $250 to purchase insurance. In other words, he would be losing money by receiving less money per month, but in doing so the state was covering the liability. Ms. Lea answered that she would hesitate to claim a specific number because different products had different ways of funding a benefit. The division had eight different products presented to them. The Treasury Division was also developing a few custom products. Usually, it was a combination of the insurance premium paid by the employee while employed that guaranteed the payment. Some companies would also have a reduction to the paid benefit. Much of it depended on how long an individual had been in the program. Representative Guttenberg thought the payout money had to come from some place. He suggested it would come from the employee's benefit. He wondered if he was accurate. Ms. Lea responded that he was absolutely correct. She elaborated that the fees that were paid through the insurance premium or reductions taken from the benefit amount was particular to the participant. The participant sustained the cost and there was no cost to the plan. 4:25:57 PM Representative Pruitt suggested that the deletions in the bill helped to simplify the products. He wondered why the legislature chose to put specific products in statute rather than leaving it open. Ms. Lea recalled that at the time there was no specific reason for certain products to be in statute. In drafting the bill, the bill sponsor used a combination of a bill structure that came from the National Council of Legislators and different provisions lifted from the state's supplemental annuity plan. The disbursement options that could currently be seen in the PERS and TRS distribution plan were the ones that were in the SBS plan at the time of the bill's passage. The difference was that the SBS structure was codified in statute. However, it was operated by a plan document. The division had an easier way to make changes for SBS or the Alaska Deferred Compensation plan. In order to add any new options or provisions to the plan they went through the ARM Board process and a regulation process. The legislature was notified every time regulations were promulgated. The public was invited and those groups that represented the public were invited to the ARM Board meetings. She emphasized that when the division made a change to SBS and deferred compensation the process was much faster. Unfortunately for the PERS and TRS DCR plans, the disbursement information was placed in statute requiring a bill to make changes. The division was not nimble. 4:28:32 PM Co-Chair Seaton added that he had been involved in the process of changing from a defined benefit to a defined contribution system. There were several details everyone wanted to lock down. The newer products were not available at the time. The disbursement options were ones the state was already using and were incorporated in statute. Everyone knew there was a full plan and how it would be used. He favored making the plan work better for individuals. Co-Chair Foster suggested that for those who wanted to offer amendments, they should submit them to his office by 5:00 PM on Wednesday, April 11, 2018. He would bring the bill up at the afternoon meeting on the following day. HB 306 was HEARD and HELD in committee for further consideration. Co-Chair Foster reviewed the agenda for the following day. 4:30:32 PM AT EASE 4:31:23 PM RECONVENED Representative Wilson asked if there were documents available for tomorrow's meeting at 5:00 P.M. Co-Chair Foster responded in the affirmative.