With discussion in recent months of starting a pension program for its employees, the Frankford Town Council recently held a workshop to learn about potential plan options.
Last week, Frankford resident Marty Presley, who has 30 years of experience in the financial field, presented a variety of pension options to Council Members Joanne Bacon, Cheryl Workman and Pamela Davis.
“There are a lot of different plans out there that you can choose,” he said.
Presley said that, according to figures from the U.S. Bureau of Labor, the per capita income in Frankford is $17,580. He said that the per capita income for Town employees is $42,250 — a level 240 percent over that of the average town resident.
Presely also compared residents’ private-sector benefits as a percentage of their income, equaling 29 percent, according to the Bureau of Labor, which includes Social Security, Medicare, unemployment and life insurance. For the employees for the Town of Frankford, the benefit percentage is 51 percent, not including Social Security, Medicare and unemployment.
Presley recommended that the Town consider a 403-B plan, which is similar to a 401-K that is set up with a mutual fund or insurance company.
“They’re very simple. They’re very cost-effective,” he said. “And a wide, wide range of companies offer them.”
Presley said such a plan allows for both employer and employee contributions.
“The Town can decide how much they want to contribute each year,” he said. “The employee can change their contribution on a weekly basis if they want to. So it’s very flexible.”
Presley said the plans are governed by federal law, and employees would be able to go online at any time to check their investments and balances, as well as receive annual statements as to the health of their plan.
Presley said loan provisions are available as a way to access the funds prior to turning 59.5, so funds borrowed before then will not be subjected to a 10 percent penalty fee plus well as regular income tax.
“Loan provisions allow them to access up to 50 percent of their account balance at any time.”
Presley said the funds could be accessed for hardship withdrawals, divorce, disability or to buy pension credits.
If the employee changes employers and their new employer doesn’t offer a 403-B plan, Presley said they have many options for the funds — including rolling them into an IRA.
Participation in such a plan is voluntary, noted Presley. If an employee does not want to pay into the plan, they would not be required to do so.
For 2014, Presely said, the contribution limit per participant is $52,000. He said that, of that total, employees are allowed to invest up to $17,500 into their individual plan. The rest of the funds, up to the $52,000 limit, may be contributed by the employer, but that is not a mandatory contribution.
Presley said the Town can also decide when the employee is vested, which could help with employee retention.
“The Town can really tailor it based on the type of employees they want or what they’re trying to accomplish… [It] encourages proper performance and kind of discourages laziness and mediocre performance on a job.”
He added that the employer can make their contributions on a monthly basis, or in a lump sum once a year.
Presley said that his calculations show that the $65,000 that was already set aside for the employee pension program would cover the maximum contribution of both the employer and employee portion of the plan for three years.
Town Solicitor Dennis Schrader stated that the council had not made the decision to spend money on a pension plan, which is why they were hearing the presentation.
Presley said the Town needed to be wary of pension plans, as many towns — even cities, including Detroit and six towns in California — have gone bankrupt primarily because of pension costs.
“If they’re not going to bail out Detroit, they’re probably not going to bail out Frankford,” said Presley of the federal government.
“We’d be cheaper,” quipped Schrader.
Presley also presented other pension options to the council, including a State-defined benefit plan, which has two plans — one for police and firefighters, and another for county and municipal employees.
“Although they work the same, they’re totally different as far as funding obligations,” he said.
Such a plan is positive for older employees, he noted, and rewards long-term employment with the same employer, and employees make no investment decisions or assume any investment risk.
“The benefits are paid out based on your years of service,” said Presley.
He added that the unknown investment risk, the unknown employer contributions that are set by the State each year and that the pension would not be portable are disadvantages of such a plan.
“Each year, you’ll never know what the Town has to contribute,” he emphasized.
In 2013, Presley said, the annual required contribution by an employer for a defined benefit plan was 14.75 percent of that year’s salary for police officers, with a 7 percent contribution by police employees. The employer also had to contribute 6.84 percent for non-police employees, with those employees required to contribute 3 percent of their annual salaries.
Based on last year’s annual required contributions, the Town would have had to pay a total of $18,599 that year for the defined benefit plan, with employees paying a total of $8,270.
“That number changes every year,” he said of the contribution percentage requirement. “That’s a real risk for the Town.”
He added that, since the signing of House Bill 274, which removed the 15 percent cap on employee benefits, if the defined benefit plan is approved and the Town pays the employees’ shares, along with healthcare costs, it would equal 51 percent.
Presley emphasized that, once the Town is enrolled in the plan, that enrollment would be irrevocable.
“You can’t get out,” he said. “There’s no getting out of it.”
Another defined contribution plan, Presley said, would be a 401-K, which would allow the employee to determine how much money they want to contribute to their fund.
He stated that a 401-K plan is portable, so if an employee were to leave the Town, the money would go with them.
“It’s an attractive plan for younger employees and older employees looking to retire soon,” he said. “Nowadays, people don’t work for the same people.”
Schrader requested that Presley recommend to the council a few companies that manage 403-B plans, so they may look further into such a plan.
Presley said that he believes the Town should have a pension plan. However, he urged the council to consider all its options and remember that the Town’s citizens will be footing the bill.
“There should be some type of pension plan for the Town of Frankford,” he said. “[But] you also have a fiduciary responsibility to represent the citizens of Frankford. There’s a balancing act here.”