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An Analysis of Defined Contribution (DC) Plans

Great PlainsPublic Employee Retirement System

ForumNovember 14, 2007

Jon Forman, Vice Chair, Board of Trustees Oklahoma Public Employees Retirement

System (OPERS)www.law.ou.edu/faculty/forman.shtml

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Overview

• OPERS and SoonerSave

• Fees and Individual Accounts

• Improving Asset Allocations for Individuals

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ORGANIZATIONAL STRUCTUREOklahoma Public Employees Retirement System

Advisors &

Consultants

Board of Trustees

Director of Finance and

CFO

Director of Member Services

Executive Director

Director of Information Technology

Chief Investment

Officer

Assistant CFO

Financial Services

Administrator

Member Services

Administrator

Defined Contribution

Plans

Manager

Communication & Counseling

General Counsel

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OPERS Traditional DB Plan6/30/2006

Active OPERS Members 45,472

Retired OPERS Members 24,372

OPERS Plan Net Assets $5,817,165,538

OPERS Funded Ratio 71.4%

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SoonerSave

• Division of the Oklahoma Public Employees Retirement System (OPERS)

• Administered by 13 member Board of Trustees

• One of the first deferred compensation plans for public employees

• Top ten State plans in participation %. (67% as of 9/30/2007)

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SoonerSave

SoonerSave

Deferred Compensation Plan457 Plan

Employee Contributions

Savings Incentive Plan401(a)

Employer Contributions($25 per month contribution

from the State)

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SoonerSave - Contribution Limits for 2007

• Regular $15,500

• 50+ Catch-Up $20,500– for employees age 50 and older

• Standard Catch-Up $31,000– available 3 years prior to year of retirement

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SoonerSave – Investment Options

• Bond• Balanced• Large-Cap• Mid-Cap• Small-Cap• International• Stable Value• Self-Directed Brokerage Option

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SoonerSaveDeferred Compensation Plan

Investments 9/30/2007$478,898,603

Large Cap

23%

Bonds

6%

Inter.

13%

Brokrg

1%

Small Cap

10%

Balanced

4%

Stable Value

30%

Mid Cap

13%

Savings Incentive PlanInvestments 9/30/2007

$121,806.820

Inter.10%

Large Cap21%

Mid Cap15%

Balanced3%

Bonds6%

Small Cap8%

Stable Value37%

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SoonerSave 457 Plan ReviewHow Assets are Invested:

Extent to which SoonerSave Participants are Investing in Multiple Funds

One Fund40%

Two Funds20%

Three Funds13%

Four+ Funds27%

56% of participants investing in one Fund

are invested in the Stable Value Fund

How Contributions are Invested:Extent to which SoonerSave Participants are

Contributing to Multiple Funds

One Fund46%

Two Funds20%

Three Funds12%

Four+ Funds22%

57% of participants contributing to one Fund

are contributing to the Stable Value Fund

As of12/31/06

Transfer Behavior

No Funds Transfer w ithin last 6

months95%

Funds Transfer w ithin last 6

months5%

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Fees• Portfolio management, fund administration,

shareholder service, and other miscellaneous costs.– GAO these investment fees make up 80 to 99 percent

of fees

• Record-keeping fees associated with maintaining participant accounts, processing fund selections, and mailing account statements.

• Fees associated with setting up a plan and explaining it to employees

Source: U.S. Government Accountability Office, Private Pensions: Changes Needed to Provide 401(k) Plan Participants and the Department of Labor Better Information on Fees (GAO-07-21, 2006)

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Fees Hurt

• Imagine a 45-year-old employee who plans to leave $20,000 until age 65

• @ 6.5 percent net annual return– 7 percent investment return minus ½ percent for fees– that $20,000 will grow to $70,500

• If fees are 1.5 percent– that $20,000 will grow to just $58,400– additional 1 percent annual fee reduces account

balance by 17 percent

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DB Annual Rates of Return outpace DC Plans 1995-2002

Average DB Rate of Return Average DC Rate of Return

Source: Retirement Services Roundtable analysis of Watson Wyatt data

(1.3%)

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Fees – Recent Developments

• Regulation– U.S. Department of Labor– ERISA Advisory Committee

• Legislation– Rep. George Miller

• Litigation– Breach of fiduciary duties

Source: Jonathan Barry Forman, The Future of 401(k) Plan Fees, in New York University Review of Employee

Benefits and Compensation—2007, Chapter 9, pp. 9-1 to 9-18 (Alvin D. Lurie ed., 2007).

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Improving Asset Allocations for Individuals

• Lifecycle Funds

• Lifestyle Funds

• Managed Accounts

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Target Maturity Funds(LifeCycle Funds)

• Member chooses fund closest to projected retirement date

• Fund will allocate investments over time from aggressive to conservative

• Average expense ratio 1.29%*• Meant to be one-stop shop for retirement

investing. • Does not consider assets outside the fund or life

expectancy• Does not offer employer fiduciary protection

*Source: Morningstar as of 12/31/06

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Lifestyle Funds

• Member selects fund reflecting their risk tolerance: Conservative, Moderate, Aggressive

• Meant to be one-stop shop for retirement plan investing

• Up to member to consider assets outside of plan in selecting fund

• Does not reflect age or other life changes• Does not offer employer fiduciary

protection

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Managed Accounts

• Personalized to individual financial circumstances and retirement goals

• Considers Assets outside the Plan

• Reflects life and age changes

• Employer Fiduciary Protection

• Asset allocation based on information provided by member

• Asset based fees