HB 306-PERS/TERS DISTRIBUTIONS  3:57:36 PM CHAIR KITO announced that the final order of business would be 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." 3:57:50 PM LESLIE RIDLE, Commissioner, Department of Administration (DOA), introduced HB 306 on behalf of the House Rules Committee by request of the governor. She specified that the request had originally come from the Alaska Retirement Management Board (ARMB), which has a committee that helps state employee with Tier IV retirement plans to prepare for retirement. 3:59:23 PM KATHY LEA, Deputy Director, Division of Retirement and Benefits, Department of Administration (DOA), presented HB 306 on behalf of the House Rules Committee by request of the governor. She presented a PowerPoint entitled, "HB 306 / SB 159. PERS/TRS Disbursement Options," [in committee packet]: MS. LEA spoke to slide 3, "The Issue": The PERS/TRS DCR (Tier IV) plans use the statutes as the plan document. ? Any changes to modernize options or to meet new Internal Revenue requirements require a statutory change. ? Statutory changes can take several sessions to accomplish, if at all. ? Meanwhile, participants needs are being unmet. ? This bill would give the DCR plans the same flexibility as the SBS and Deferred Compensation plans. MS. LEA went on to address slide 4, "PERS/TRS DCR Needs": ? The PERS/TRS DCR plans have vested employees who are retiring and need help facing the challenges of retirement. ? The ARMB Defined Contribution Subcommittee is exploring options that will help participants: o not outlive their retirement savings, o address purchasing power over time, and o protect against market uncertainty. MS. LEA closed the presentation with slide 5, "Transparent Process for Change": ? Discussions regarding disbursement options are done in a public forum during the selection process. ? Participants and groups representing participants will have input during subcommittee and ARMB committee meetings. ? The process remains public and transparent, but allows for faster adoption of needed change. ? All interested parties are notified of any changes through the regulation process. 4:02:44 PM REPRESENTATIVE JOSEPHSON asked about the terms of Tier IV retirement. MS. LEA answered that in the Defined Contribution Retirement (DCR) plan, an employee is eligible to full retirement disbursement of the state contribution after 5 years of employment. She explained that before the 5th year there is a staggered table for disbursement so that at 2 years the employee receives 25 percent of the state contributions; at 3 years the employee receives 50 percent; at 4 years receives 75 percent; and at 5 years the employee receives 100 percent. She specified that in the DCR plans there is no real retirement, only a disbursement of funds. She underlined there is a tax penalty of 10 percent for early withdrawal before age 59 and a half. She said currently a lump sum disbursement, a periodic payment, or various annuity options are the only options available. REPRESENTATIVE JOSEPHSON asked what the Alaska Retirement Management Board (ARMB) might add. MS. LEA answered that an ARMB subcommittee has tasked the Treasury Division and the Division of Retirement and Benefits with exploring options. She stated the group had recently reviewed eight different providers for efficacy and retirement security. She said the plan options fell into three categories: a better annuity, a guaranteed lifetime withdrawal product, and a qualified lifetime annuity that sets aside up a portion of the money to begin to pay out at age 80. 4:07:38 PM REPRESENTATIVE KNOPP asked what the state program can do that free markets cannot. MS. LEA answered the plan is not looking to make money and can offer the plan with lower costs, so can provide members with more money for retirement. MS. RIDLE added there would be a private sector element involving contracts, but the state can get better rates. REPRESENTATIVE KNOPP said he wondered about the true savings involved. 4:11:59 PM REPRESENTATIVE BIRCH asked whether the state is empowered to set up a Roth IRA. MS. RIDLE answered that for government defined contribution plans currently only deferred compensation plans are eligible and the state has a Roth option in its plan. REPRESENTATIVE SULLIVAN-LEONARD asked about a fiscal note for changes in the program. MS. LEA answered there is a fiscal note and there is no fiscal impact for HB 306. She explained the option are left to the participant to choose and therefore pay additional fees. REPRESENTATIVE SULLIVAN-LEONARD asked for confirmation that the costs are paid by individual who sign up for the options. 4:14:26 PM MS. LEA answered in the affirmative. CHAIR KITO asked about the motivation behind putting options in statute. MS. LEA said she could not speak to legislative intent. She added she did work in the division at the time and the division recommendation was not to put them in statute. 4:15:52 PM REPRESENTATIVE JOSEPHSON asked for confirmation that the descriptive language that would be deleted in HB 306 was not recommended by the department but had been put in by legislators. MS. LEA answered in the affirmative. She added that in discussions during the drafting process, the desire was to pattern the plan after the SBS disbursement options. She said the difference was that statute for SBS and for DCR only authorized the backbone of plan, while all other provisions are in the plan document, which is required by IRS. She stated the difference with the DCR plans is that they use statute as the plan document. She explained that while other plans are nimble if changes are needed, DCR plans are not. 4:17:48 PM ROB JOHNSON, Chair, Alaska Retirement Management Board (ARMB), testified in support of HB 306. He stated the ARMB had heard that greater flexibility was preferred for retirees. He confirmed that the legislature had indeed looked to other sources for language and utilized SBS and deferred compensation language. He added that in time, it became clear that greater options were available at no additional cost to the state. He said ARMB agreed with the adoption of the proposed bill. 4:20:27 PM REPRESENTATIVE SULLIVAN-LEONARD asked Mr. Johnson to expand on the portability of retirement plans and whether there was a trend of employees not staying in the state system for more than five years. MR. JOHNSON said he has not looked at the studies, but he had heard that the change to the defined contribution plan had implications for public employee and teacher retention. 4:22:07 PM NORM WEST, Alaska Retirement Management Board, testified in support of HB 306. He stated he had over 30 years of experience as a trustee and administrator of employee benefit plans. He added he had seen overseen the management of portfolios worth over $100 million. He said he had seen many changes in retirement plans over the years. He spoke to defined contribution plans which do not offer a particular benefit and pass the risk of the investment to the participants. He said this was the major change from defined benefit plans. He stated his support for the proposed bill. He underlined the changes in HB 306 were only about methods of disbursement. MR. WEST explained that the products are essentially structured investment products which allow for periodic payment. He underlined there was no risk to the state and that participants would need to move their payments into a different plan to avoid taxation of the lump sum. He surmised that the statutory limitations had been an oversight. 4:29:29 PM CHAIR KITO opened public testimony on HB 306. Upon ascertaining that no one was available to testify, he said he would leave public testimony open for HB 306. CHAIR KITO held over HB 306.