LANS Total Compensation Design and Strategy Proposal to NNSA, Revision 2

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LANS Total Compensation Design and
StrategyProposal to NNSA, Revision 2

• March 3, 2006

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Contents

• Section A - Contract Requirements
• Section B - LANS Objectives
• Section C - LANS Benefit Design Policy Statement
• Section D - Total Compensation Plan 1 (TCP1)
  Substantially Equivalent to current UC LANL
  benefits package
• Section E - Total Compensation Plan 2 (TCP2)
  Market-driven benefits package
• Section F - Employee Communication
• Section G- Estimated Costs of Retirement Plans
• Section H- Retirement Plan Age 65 Retirement
  Income
• Section I - Investment Transition Strategy
• Section J - Current Retirees

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Section A Contract Requirements

• Requirement for establishment of a total
  compensation package that is substantially
  equivalent to that provided by the predecessor
  contractor for Transferring Employees (not
  including Inactive Vested Transferring
  Employees).
• Requirement for establishment of market-driven
  total compensation package, for new hires and
  other transferring employees, that does not
  exceed 105 of Employee Benefits Value Study in
  comparison to DOE approved comparator companies.
• Requirement to provide substantially equivalent
  retiree medical and dental benefits for current
  retirees.
• Both total compensation packages are subject to
  review and approval of the NNSA Contracting
  Officer. In addition, the Contracting Officer
  will determine substantial equivalency by
  comparing the LANS total compensation package
  with the benefits provided by the predecessor
  contractor.

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Total Compensation Packages
Active
Substantially Equivalent Total Comp. Package 1
UCRP Asset Transfer
UC Unvested Transferring Employees
(1 2)
No UCRP Benefits
Active
UC Vested Transferring Employees
(1)
Market Driven Total Comp. Package 2
Inactive
No UCRP Asset Transfer
UC Retiring/ Retired Employees Hired by LANS
LANS New Hire Employees
Inactive

• Notes
• Transferring Employees are those employees who
  transfer from employment with the UC to
  employment with the Contractor on 6/1/06 who do
  not retain credit for prior service and cease to
  be participants in UCRP.
• UC Unvested Transferring Employees electing TCP2
  will not retain credit for prior service and will
  cease to be participants in UCRP.

Industrial Partners Transferring or Rehired
Employees
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Section C - LANS Benefit Design Policy Statement

• Subject to further review, refinement and NNSA
  approval, the LANS Board of Governors Executive
  Committee authorized the LANS President to obtain
  NNSA approval to
• 1) Provide a "Substantially Equivalent" benefit
  plan to UC transferees hereinafter referred to as
  Total Compensation Package 1 (TCP1) which
  includes
• a replication of the UCRP to the maximum degree
  possible under ERISA regulations,
• a replication of the UC-LANL retiree medical
  plan,
• an unmatched 401(k) defined contribution plan to
  replace the current UC 401(a), 403(b) and 457(b)
  plans,
• a replication of the UC-LANL health and welfare
  plans (medical, dental, life, disability, etc.)
  and

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Section C - LANS Benefit Design Policy Statement
(cont.)

• 2) Provide a "Market Driven" benefit plan for new
  hires, retiring UC employees and other LANS
  partner company transferees hereinafter referred
  to as Total Compensation Package 2 (TCP2). TCP2
  shall not exceed 105 of market, aligned with
  peer companies and includes
• An access-only retirement medical plan,
• a 401(k) plan with a matching company
  contribution plus an additional service-based
  company contribution, and
• a replication of the UC-LANL health and welfare
  plans (medical, dental, life, disability, etc.)

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Section D - Total Compensation Package 1

• TCP1 objective is to provide a complete package
  of employee pay and benefits plans in the
  aggregate compared to UC LANL
• Per RFP, LANS must consider amending TCP1 pension
  plan consistent with future UCRP changes
• Substantially equivalent benefit plans will be
  provided by substantially replicating the UC
  benefits (see page 7 bullet 5)
• A Mercer Benefits Value Study Hewitt Benefits
  Value Study both conducted in January 2006 have
  concluded that TCP1 and the current UC LANL
  benefit plans have nominally the same relative
  value and are therefore substantially equivalent
• ERISA required changes to pre-retirement survivor
  benefits would increase the value of TCP1 by
  about 0.2
• Estimated value of reduced employee defined
  contribution pre-tax savings opportunities and
  new social security taxes, compliant with IRS
  regulations, would reduce TCP1 value by about 0.5
  to 0.6

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Section D - Total Compensation Package 1 (cont.)

• UC-LANL benefits are substantially above market
  i.e., 129.9 of market relative value per
  Benefits Value assessment conducted by Hewitt
  Associates in January 2006
• Peer companies for the Hewitt Associates Benefits
  Value assessment utilized same peer companies
  approved by DOE for the April 2004 study
• UC-LANL Employee Benefits Value Study conducted
  by Hewitt in April 2004 reflected that UC-LANL
  benefits were substantially above market i.e.,
  119 of market relative value
• 2004 to 2005 change in market relative value
  primarily due to peer companies shifting more
  health and welfare cost to employees
• Will replicate means the benefit delivered will
  be substantially equivalent

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Section D - Total Compensation Package 1 Current
Benefits vs. TCP1

• Time Loss and Health Welfare will be replicated
  for LANS

Total Workforce Analysis1
of Total Benefit Package Compared to Median
Value
100
100
1. Results presented are based on Hewitt 2006
Benefit Index Study
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Section D - Total Compensation Package 1 Current
Benefits, TCP1 Peer Group

• Time Loss and Health Welfare will be replicated
  for LANS

Total Workforce Analysis1
of Total Benefit Package Compared to Median
Value
of Total Median DOE Value
129.9
129.9
100
1. Results presented are based on Hewitt 2006
Benefit Index Study
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Section D - Total Compensation Package 1
Summary of Current UC and Future LANS TCP1
Defined Benefit Plans
 MHRC1Bob, this was a possibility that Scott
and I raised when we were all on the phone
together. Do you want to include it here?
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Section D - Total Compensation Package 1
Summary of Current UC and Future LANS TCP1
Defined Benefit Plans (cont.)
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Section D - Total Compensation Package 1
Summary of Current UC and Future LANS TCP1
Defined Benefit Plans (cont.)
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Section D - Total Compensation Package 1 Summary
of Current UC and Future LANS TCP1 Defined
Benefit Plans (cont.)
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Section D - Total Compensation Package 1 Summary
of Current UC and Future LANS TCP1 Defined
Benefit Plans (cont.)
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Section D - Total Compensation Package 1
Highlights of Current UC and Future LANS TCP1
Defined Contribution Programs

• Current UC Defined Contribution Program consists
  of three plans
• 457(b) Deferred Compensation Plan (457(b))
• 401(a) Defined Contribution Plan (401(a) DC)
• 403(b) Tax-Deferred Annuity Plan (403(b) TDA)
• Due to ERISA regulations for private sector plans
  vs. governmental plans, the future LANS Defined
  Contribution Program will consist of only one
  plan
• 401(k) Defined Contribution Plan

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Section D - Total Compensation Package 1
Highlights of Current UC and Future LANS TCP1
Defined Contribution Programs (cont.)
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Section D - Total Compensation Package 1
Highlights of Current UC and Future LANS TCP1
Defined Contribution Programs (cont.)

• LANS employees will now be subject to private
  sector rules vs. governmental (public) plan rules
  for maximum allowable pre-tax savings
• Maximum employee pre-tax savings opportunities
  are reduced to 401(k) rules vs. 403(b) and 457(b)
  rules, see below for 2006 limits
• Also Mandatory Pre-tax Contributions in the
  401(a) DC Plan cannot be replicated (2 for most
  employees)

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Section D - Total Compensation Package 1
Highlights of Current UC and Future LANS TCP1
Defined Contribution Programs (cont.)
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Section D - Total Compensation Package 1
Highlights of Current UC and Future LANS TCP1
Defined Contribution Programs (cont.)
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Section D - Total Compensation Package 1
Summary of Current UC 415(m) and Future LANS
TCP1 Non-Qualified Plans
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Section D - Total Compensation Package 1
Summary of Current UC 415(m) and Future LANS
TCP1 Non-Qualified Plans (cont.)
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Section D - Total Compensation Package 1 Summary
of Current UC and Future LANS TCP1 Health
Welfare Plans
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Section D - Total Compensation Package 1 Summary
of Current UC and Future LANS TCP1 Health
Welfare Plans (cont.)

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Section D - Total Compensation Package 1
Summary of Current UC and Future LANS TCP1
Health Welfare Plans (cont.)

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Section D - Total Compensation Package 1
Summary of Current UC and Future LANS TCP1
Retiree Health Welfare Plans

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Section E - Total Compensation Package 2

• Objective is to attract retain talent
• TCP2 must be market driven should not exceed
  105 of market based on an Employee Benefits
  Value Study.
• Will replicate UC-LANL HW plans for site
  consistency.
• In response to the market, the TCP2 benefits
  package will have a
• Defined contribution plan, and
• Access-only retirement medical plan

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Section E - Total Compensation Package 2
Proposed TCP2 Retirement Program Pros/Cons

• Pros
• All Account-based Easiest to communicate and
  portable
• Predictable Costs
• Retention element in service-based contribution
• No investment risk for customer
• Cons
• Benefits front-loaded
• Investment and mortality risk for employees
• Benefit structure is different than TCP1 and Peer
  Organizations

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Section E - Total Compensation Package 2 TCP2
vs. Median of Peer Group

• Time Loss and Health Welfare will be replicated
  for LANS

Total Workforce Analysis1
of Total Benefit Package Compared to Median
Value
of Total Median DOE Value
105.0
100
1. Results presented are based on Hewitt 2006
Benefit Index Study
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Section E - Total Compensation Package 2
Proposed TCP2 Defined Contribution 401(k) Plan
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Section D - Total Compensation Package 2 Summary
of Current UC and Future LANS TCP2 Health
Welfare Plans
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Section E - Total Compensation Package 2 Summary
of Current UC and Future LANS TCP2 Health
Welfare Plans

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Section E - Total Compensation Package 2 Summary
of Current UC and Future LANS TCP2 Health
Welfare Plans (cont.)

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Section E - Total Compensation Package 2
Proposed TCP2 Retiree Medical and Dental Plan
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Section E - Total Compensation Package 2
Employee Benefits Value Study Peer Companies
RD Focused Large Employers

• Battelle PNNL
• Eastman Kodak
• General Electric Company
• Hewlett Packard
• Honeywell International Inc.
• IBM Corporation
• Lockheed Martin Corporation

• Lucent Technologies
• Motorola, Inc.
• Northrop Grumman Corporation
• Raytheon Company
• Sandia National Laboratories
• SBC Communications Inc.
• United Technologies
• Xerox

Note TRW was included in the 2004 Benefits Value
assessment. Due to the sale of TRW to Northrop
Grumman Corporation in 2002, Northrop Grumman has
been included as a replacement peer company for
TRW. Results are based on Hewitt 2006 Benefit
Index Study.
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Section E - Total Compensation Package 2
Employee Benefits Value Study Peer Companies
RD Focused Large Employers Prevalence of Designs
Retirement Plans
Note Three organizations do not offer any plan
and six of the peer organizations offer access
only plans to retirees (these are included in the
counts not offering a plan).
Note All 15 peer organizations (100) offer
defined contribution plans.
Results presented are based on Hewitt 2006
Benefit Index Study
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Section F - Employee Communication

• Employees will need to receive detailed
  communication regarding both TCP1 and TCP2
  benefit plans
• TCP2 delivers defined contribution benefits based
  on matching of voluntary employee pre-tax
  savings. Delivery of retirement benefits based
  on employee savings is a significant change from
  TCP1 and UC benefit plans and will require clear
  communication

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Section F - Employee Communication (cont.)

• In coordination with the LANS, LLC Benefits
  Pension Communication Plan
• The LANS Transition QA web site will regularly
  address questions submitted via a variety of
  mechanisms (e-mail, mail, phone calls, hotline,
  questions forwarded from UC LANL, etc.)
• A LANS Transition HR Help Desk will be
  established and maintained to address questions
  and concerns.
• A LANS Transition Hotline will be established and
  maintained to address questions and concerns.
• Small group forums (less than 30 employees per
  session) will be held to provide UC LANL
  employees who could elect to retire, the
  opportunity to meet with LANS transition staff
  (HR, management personnel) to discuss their
  employment questions concerns. Meetings will
  be coordinated by specific Tech Area or Division
  locations, and dates and times for those meetings
  will be scheduled to minimize disruption to
  normal work activities. In cases where employees
  cannot attend their specific Tech Area or
  Division meeting, make-up sessions will be
  conducted.

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Section F - Employee Communication (cont.)

• A series of Town Hall meetings will be
  coordinated to educate, inform, and respond to
  employee questions and concerns about the
  proposed benefit and pension plans as well as
  other transition questions such as employment
  opportunities with the new contractor.
• One-on-one personal employee meetings for
  specific or very unique skill categories to
  assure that key skills will be retained.
• All communications regarding meetings offered
  will be communicated via the LANS web site.
  Where it is possible to identify specific
  employees, more personal communications will be
  utilized (email, notice to employees Division or
  Group Leaders to attend the Small Group Forums.

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Section G - Estimated Cost for Retirement Plans

• Retirement plan costs are typically defined as
• Cash costs to fund the retirement benefits,
• Accounting costs as required by FASB, and
• CAS accounting costs as allowed by DOE
• Defined benefit cash costs will be based on the
  LANS funding policy, subject to ERISA minimum
  funding standards
• Retirement medical costs are typically
  pay-as-you-go and are not pre-funded
• FASB accounting costs will be based on DOE
  assumptions
• TCP2 costs will be based on demographics of
  population
• Final demographics will not be known until June
  2006
• Anticipate population will be younger and shorter
  service than TCP1
• Cannot accurately forecast costs until
  age/service profile is known

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Section G - Estimated Cost for Retirement Plans
Estimated Cost As of Payroll

• Defined Benefit plan costs will vary due to ERISA
  requirements Underlying annual cost is shown
• DC plans are typically budgeted as fixed
  percentage of payroll, based on stable employee
  population and savings rates
• Retirement Medical costs represent annual
  underlying cost of benefits earned, not annual
  cash-flow
• Actual costs will vary based on final employee
  demographics

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Section H - Retirement PlanAge 65 Retirement
Income

• TCP1 does not require 6 employee savings to
  maximize employer benefits
• Assumes 35-year career
• Individual retirement replacement income will
  vary based on age, service and pay
• Excludes retirement medical benefits

Employee Age 30 Hired in 2006, 6 Annual Savings
and 7 Investment Returns
157
152
148
144
136
130
126
122
40,000 60,000
80,000 100,000
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Section H - Retirement PlanAge 65 Retirement
Income

• TCP1 does not require 6 employee savings to
  maximize employer benefits
• Assumes 25-year career
• Individual retirement replacement income will
  vary based on age, service and pay
• Excludes retirement medical benefits

Employee Age 40 Hired in 2006, 6 Annual Savings
and 7 Investment Returns
118
114
109
106
95
90
85
82
40,000 60,000
80,000 100,000
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Section H - Retirement PlanAge 65 Retirement
Income

• TCP1 does not require 6 employee savings to
  maximize employer benefits
• Assumes 15-year career
• Individual retirement replacement income will
  vary based on age, service and pay
• Excludes retirement medical benefits

Employee Age 50 Hired in 2006, 6 Annual Savings
and 7 Investment Returns
86
81
76
72
68
62
57
53
40,000 60,000
80,000 100,000
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Section I - Investment Transition Strategy

• Review the current plan sponsors list of
  investment managers and asset allocation.
• Discuss the transition with the current plan
  sponsors custodian to determine if they are in a
  position to accept a new assignment with LANS.
• Compare the current custodians services fee
  structure with those of other viable
  organizations.
• Review the investment manager list from DOE sites
  that Mercer works with and update the due
  diligence on those managers to identify viable
  candidates to use in the LANS Plan.
• Review the investment manager fees to confirm
  that the LANS fees can be reduced by
  collectively applying multiple sites assets to
  each of the managers fee schedules.

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Section I - Investment Transition
Strategy(cont.)

• Compare the investment manager list from the
  current plan with the list that passes due
  diligence from DOE sites to determine if an
  asset in kind transfer might be possible to
  further reduce transition costs.
• Meet with the LANS Benefits Committee to discuss
  which investment managers to retain, what asset
  allocation targets to adopt, which custodian to
  retain, and to ratify a draft for the new
  Investment Policy Statement.
• Work with the current actuary on process and
  allocation of responsibilities for determining an
  estimate of the dollar amount of assets to be
  transferred into the new Plan.
• In the interest of time, ask the current Plan
  Sponsor to approve a cash transfer of a
  percentage (ideally 90) of the estimated dollar
  amount so that the investment program can be set
  up before June 1, 2006.

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Section I - Investment Transition Strategy
(Contd)

• Negotiate contracts with the investment managers
  and the custodian.
• Establish a true up date for the remaining
  amount to be transferred.
• Negotiate contracts with the investment managers
  and the custodian.
• Have the LANS custodian set up accounts for the
  investment managers and allocate funds to the
  managers based on the asset allocation structure
  that is adopted.
• Proactively plan to conduct an Asset/Liability
  Study of the new Plan as early as is practical so
  that the asset allocation can be customized to
  fit the liability structure of the LANS
  participants.

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Section J Current Retirees Summary of
Retiree Health Welfare Plans