Photo: Panorama of the nightime skyline of Honolulu and Waikiki from Ala Moana Park as the sun sets

HolomuaW o r k i n g t o f u l f i l l y o u r r e t i r e m e n t d r e a m s . . .

Ret i rees & Ac t i ve Member sWi

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Inside this

Issue:

ERS Awaiting Private Letter Ruling from IRS

2017 Spring Filing Session Schedule

Getting Better All the Time

As members live longer, pension plans work to ensure sustainability The good news is we are all living longer—about two years longer in fact, according to national statistics. According to the 2013-2014 Measure of America, Hawaii has the longest life expectancy in the United States.

The diagram below has been compiled by the Centers for Disease Control and Prevention from data gathered from 98 per-cent of the medical files for all deaths across the U.S. in 2010. It reveals how different states experience different risks of mortality, listing the number of people who died in the state for every 100,000 people in the country.

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ERS Brown Bag Sessions

Hawaii noted the lowest number of deaths across the states at 589.6 deaths per 100,000 of the population, a staggering 21 percent lower than the average for the entire country.

This statistic corresponds with the longevity data noted above. The national average for life expectancy at birth is 79.7 years and for Hawaii it’s 81.3 years.

The report also took into consideration several factors that are important to living a long, healthy life. These include

access to health insurance, obesity rate, percentage of smokers, and average income. Access to health coverage is among the important factors that promotes good health — and as a result leads to longer lives. In most of the states with the longest life expectancies a far lower percentage of the population was uninsured relative to the nation as a whole. While 14.5 percent of Americans did not have health care coverage last year, only 3.7 percent of Massachusetts residents did not. In Hawaii and Vermont the uninsured rate was also less than half the national rate.

2017 Pension Payment Schedule and Notices

Year-endTax Information

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Message F rom The Execu t i ve D i rec to r A recently initiated survey of those members visiting our offices reveals an overwhelming sense of customer/member satisfaction. We are rightly proud. We are developing a more extensive member survey for distribution in the new year. We will invite and encourage your participation and candid response. Despite the positive results of our on-site survey, we are first to acknowledge we can and must do more. Our membership continues to grow and demand more and timelier responses. For example, we hope to increase the number and availability of pre-retirement counseling ses-sions whether in person or by phone. The more timely and earlier availability of counseling will serve to alleviate much of the stress and concerns accompanying the important retirement timing and options decision facing our retirees.

Likewise, we plan to expedite our disability retirement determination process. An audit of that process is currently underway. I expect we will find ways to streamline and improve the quality and timing of our determinations. We owe this to our members.

I look forward to sharing with you our progress on these and other matters in subsequent issues of this newsletter.

Mahalo!

Having completed my first full year leading the ERS, I am humbled by the recognition of the very personal and vital role the organization plays in the lives of so many people of Hawaii.

While my day-to-day activities often focus on legislative, administrative, and fiscal issues affecting our operations, they also bring me into direct contact with our members and their beneficiaries.

I am struck by the length and depth of, and dedication to, public service that our membership represents. This includes our teachers, fire and safety personnel, judiciary, legislators, and others. Equally, I observe the personal and expert efforts expended by ERS staff and management to assure the benefits these members have earned are provided accurately and in a timely manner.

Prior to my hire, the ERS board commissioned an “internal audit” of all our critical activities, processes and services to mark our general progress and to identify areas for improve-ment. As the findings of the various audit components are developed, I have lead the effort to reform our perspective where necessary, mitigate shortcomings and renew our focus on process and service enhancement.

Completion of a first full year allows for the business cycle to begin anew with budget and legislative priorities looming large. The resources we will need to implement ongoing data security and investment and service upgrades will be prioritized and reflected in our budget request and legislative proposals.

Thom Williams

Studies have found that living until age 65 will extend your longevity by an additional year. The longer you live, the longer you are expected to live. As noted in our Spring Holomua, we have 9,783 retirees who are in the 80+ age bracket and 43 who are 100 years or more! Hawaii retirees will enjoy 2 to 3 more years of benefits than the average retiree across the country and hopefully enjoy them in good health.

While living longer is good news for all of us, there is a cost involved in providing two additional years’ worth of benefits to our members. Longer life expectancies will add to the unfunded liability of the ERS between now and 26 years from

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now when it is scheduled to be fully funded. As a result, theERS actuaries (who review the assumptions on which our funding is based) recommend that the ERS mortality tables be adjusted to accommodate Hawaii’s long-lived population and also recommend substantial increases in retirement contributions by the state and counties.

Although ensuring the longevity of benefits to meet the longevity of our members is a challenge for us, the ERS staff and Board of Trustees are committed to ensuring the sustainability of the ERS fund while balancing the needs of our retirees, active members, employers and taxpayers.

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Ua ‘Ike Anei ‘Oukou? (Did you know?)Approximately 30 percent of the total service retirements in any given year are on December 31st. In 2015, this was 651 of 2,240 retirements. For 2016, both the total number of retirements and the percentage of December 31st retirements is expected to be greater.

Repor t f r om V i j oy Cha t t e rgy, Ch ie f I nves tmen t O f f i ce rAloha Kãkou.

Albert Einstein, the renowned scientist and popular-culture icon, once famously quipped that “everything should be made as simple as possible, but no simpler.” The elegant statement reveals a preference for simplicity and clarity that can be applied to thought, design, theory, programming—most any endeavor.

Einstein’s quote was profoundly embodied through the Gettysburg Address speech by President Abraham Lincoln. Contrasted with Edward Everett’s two hour oration, which was given at the same event, the 272 words that President Lincoln spoke captured and honored the occasion, giving the nation a rationale for the ongoing Civil War. Of course, another elegant example of the simple but not too simple in action is Einstein’s own formula for the theory of special relativity, E=mc2.

Now, the reason that this particular quote has been on my mind lately is a recent series of articles in the financial media about passive and active investment management strategies. The well-worn argument is that low cost passive outperform active strategies, particularly after fees are taken out. The presumption then leads to the conclusion that it’s best to keep things simple as possible by holding passive strategies that charge very low fees. This is actually excellent advice and the evidence is compelling, but it needs to be qualified for the investor type, the access to opportunities, and the level of investment acumen--in other words, “but no simpler.”

The ERS portfolio is more complex than a 60/40 stock/bond split that only holds Exchange Traded Funds or capital-weighted indexed investments. The traditional simple portfolio structure might still be appropriate for an individual investor, but for the institutional investor like the ERS, access to investment opportunities creates the potential to build a more transparent, less risky, and lower cost portfolio while still remaining true to the principle of being simple but not overly simple.

For example, over the past 24 months, the ERS has made changes in the portfolio that lowers fees by $1.6 million a year compared to the previous portfolio. The new strategies include traditional passive global equity strategies, but also a significant options selling approach that is not widely accessed by other investors. The options selling strategy is expected to produce equity level returns with much less risk. Additionally, in 2017 the ERS will implement an allocation designed to offset the market risk of its equity and equity-like investments through a systematic, rules based approach to strategies that will help lessen negative equity returns in a financial crisis. These new strategies will have fees lower than many of the active managers in the old portfolio.

Finally, whether trying to capture the meaning of war or the secrets of the universe, simple designs are more elegant, but extremely simplistic explanations are often just wrong and naïve. The construction of the ERS portfolio is designed to reflect an understanding of how the world works. The world of rising stock and bond markets from 1980 to 2008 seems to not be the conditions likely to dominate markets from 2017-2045. Markets are likely to be more uncertain, economic growth is likely to be slower, and interest rates may stay lower longer than expected. The portfolio is changing to reflect this new reality, but it will always remain transparent, low cost, and true to the principle of being simple but not simpler than necessary.

“everything should be made as simple as possible, but no simpler.” - Albert Einstein

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ERS Awaiting Private Letter Ruling from IRS On August 9, 2016, the Employees’ Retirement System (ERS) filed a lawsuit against the State of Hawaii and Hawaii Health Systems Corporation (HHSC) to stop Act 1, 2016 Hawaii Laws 2nd Special Session, from taking effect because the ERS believes it to be unconstitutional as it impairs the retirement benefits of all State and county employees and retirees.

Act 1 authorized the transfer of three public hospitals in the County of Maui to a private operator. As part of this authorization, qualified employees would be eligible to receive a severance benefit or a special retirement benefit upon transfer. By allowing this election between taxable and tax-deferred benefits under Act 1, the ERS’s tax-qualification under the Internal Revenue Service (IRS) may be in jeopardy.

The loss of ERS tax-qualification would result in grave consequences for the entire ERS membership. Current employees would be required to pay federal income tax on their employee contributions when the contributions are paid to the ERS instead of deferring taxes until thecontributions are distributed to them at retirement or at

an earlier termination of employment. All members wouldbe subject to federal income tax on the portion of their accrued retirement benefits that are funded by employer contributions when the benefit becomes vested, even if the benefits were not yet payable. And, all members would lose their right to the tax deferred rollover of their benefits to other retirement vehicles, such as IRAs.

The ERS Board of Trustees felt that Act 1 impaired benefits already established for ERS members and that it was their fiduciary responsibility to protect these promised benefits.

To clarify this possible violation and the resulting conse-quences, on August 26, 2016, the ERS requested a private letter ruling from the IRS.

In response to the ERS suit, on September 27, 2016, First Circuit Court Judge Jeannette Castagnetti issued a preliminary injunction confirming that Act 1 should be stayed until the ERS receives a response from the IRS.

Getting Better All the Time It is the responsibility of the ERS Board of Trustees and its management to ensure the integrity of ERS’s financial statements and accounting and financial reporting processes. Their oversight responsibilities also include the review of ERS’s compliance with legal and regulatory requirements, monitoring the performance of internal controls established by management and the Board, and reviewing the business practices and ethical standards of the ERS.

During the last three years, the ERS Board has commis-sioned the services of KMH LLP to perform internal audits of the various functional areas, activities and responsibilities of the ERS. These include Member Enrollments, Records Management and Retention, Investment Manager Selection and Evaluation, Access Controls, Data Collection and Maintenance, Member Benefits and Accounts, BenefitDisbursements, Governance and Ethics, Information

Technology Security and Internal Network and Cash and Liquidity Management and Policies and Procedures.

Current internal audit projects include Disability and Contested Case processing, Data Privacy and Protection, Investment Monitoring, Identity Access and Management, Benefit Estimates and Benefit Calculation Processing, Disaster Recovery, Business Continuity and Financial Reporting.

Findings of the internal audit provide the ERS Board, management and staff the opportunity to establish performance standards as well as identify areas in need of improvement. Our goal is to ensure that best practices are being employed, and that technology is being implemented to assure the most efficient support of our staff resources. The internal audit process also helps the ERS take a step back from what we are doing (which is working diligently to provide assured retirement, disability and death benefits) and gain some perspective on how we might approach things in order to better serve our members. Our goal, which the internal audit process helps us achieve, is to provide our members and the people of Hawaii with high quality service, optimum retirement security, and organiza-tional transparency while seeking to continuously improve.

I m p r o v i n g

For Retirees

ERS Brown Bag Sessions As the New Year begins, we continue to provide our Oahu membership with the Brown Bag informational sessions held during your lunch hour. These sessions have been revised to 1 hour to provide ANY employee -- those just starting out or ready to retire -- with an opportunity to ask your questions and get information on your retirement plan benefits. For neighbor island members, please go to our website at http:\\ers.ehawaii.gov > Members > Retirement Planning to view the schedules for Hawaii, Maui, and Kauai which will be posted in February 2017. Below is the Oahu schedule for the first half of 2017:

Feb 9Feb 23Mar 9April 5

April 19

Date Retirement Plan Time

11:30 pm to 12:30 pm

City Financial Tower-ERS

201 Merchant StreetSuite 1400

NoncontributoryHybrid

ContributoryNoncontributory

Hybrid

Location

To register, please call our office at 586-1735 at least one week prior to the scheduled workshop. Each session is limited to thirty-five (35) members. On the day of the session, please report to the 14th floor in our building and staff will accompany you to the conference room. Feel free to bring your lunch, too. Limited parking is available in our building.

2017 Spring Filing Session Schedule The ERS has scheduled dates and times for application filing and counseling appointments for Oahu members who are retiring from March 1, 2017 through August 1, 2017. Neighbor island members may contact our island representatives for an appointment. Please plan ahead and contact our office to schedule an appointment. On the right are the Spring filing sessiondates with appointment times at 8:00am, 9:15am, 10:30am, 1:00pm, and 2:15pm at the Oahu ERS office. You may request an appointment by calling 586-1735 or visit our website at http://ers.ehawaii.gov.under Members> Retirement Planning.

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For Active Members

January 30

February 1, 8, 10, 14, 16, 22, 24, 28

March 2, 8, 10, 14, 16, 20, 21, 22, 23, 24, 29, 31

April 4, 7, 12, 13, 21, 25, 26, 27, 28

May 1, 2, 4, 10, 12, 17, 19, 24, 26, 31

June 1, 21, 23, 28, 30

January 30 = Last day to file for March 1

March 2 = Last day to file for April 1March 31 = Last day to file for May 1

May 2 = Last day to file for June 1

June 1 = Last day to file for July 1June 30 = Last day to file for August 1

Filing Session Dates Last Filing Dates

2017 Pension Payment Schedule and Notices15th End of Month

Jan 13

Feb 15

Mar 15

Apr 13

May 15

Jun 15

Jul 14

Aug 15

Sep 15

Oct 13

Nov 15

Dec 15

Jan 31

Feb 28

Mar 31

Apr 28

May 31

Jun 30

Jul 31

Aug 31

Sep 29

Oct 31

Nov 30

Dec 29

Federal Income Tax Withholding: Payments from the ERS are subject to federal income tax withholding unless you elect to not have taxes withheld. You may change your withholding election by submitting a Form W-4P prior to a payroll processing date.Direct Deposit: Please keep your original account open until the first ERS deposit is made to your new account. Closing your old account too early may delay the timely receipt of a pension payment as undeposited payments will be returned to the ERS for reissue.Payment Date: Pension payments are paid on the 15th or the end of the month. If these dates fall on a weekend or a holiday, the payment date would be on the last business day prior to the weekend or holiday.

Bank account and/or financial institution

Change Form to use Remarks

Federal income tax withholding

Mailing Address

ERS-210, Direct Deposit Agreement

IRS Form W-4P, Withholding Certificate for Pension or Annuity Payments

ERS-211, Address Change

Confirm that pension payment is deposited to new account before closing old account.

Refer to tax withholding tables for approximate federal income taxes to be withheld.

Important for 1099-R forms, annual July pension statements and Holomua newsletters.

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For RetireesYear-end Tax Information If you received benefits from the ERS during 2016, your 2016 Form 1099-R will be mailed to your home address by January 31, 2017. Reprint/duplicate Form 1099-R requests will only be processed after February 6, 2017 to allow time for mail delivery. To submit an address change, please complete the Mailing Address Change form on our website at http://ers.ehawaii.gov (Resources>All Forms> General >ERS-211 Address Change).

The ERS is a “government defined benefit pension plan,” therefore all benefits paid by the ERS are classified as “pension” benefits and reported to you on the Internal Revenue Service (IRS) Form 1099-R. For terminated members, this benefit includes refunds of contributions; and for retirees, this includes option refund payments and disability benefits. (Certain retirees receiving service-connected disability benefits will receive the Annual Non-reportable Benefit Notice.) If you have a professional tax advisor, accountant, and/or tax preparer, we suggest that you make this information available for their review.

In most cases, you will receive only one Form 1099-R. However, you may receive several different 1099-R forms if you: (1) Took a refund option with a rollover to another retirement account; (2) Became age 591/2 during 2016, or (3) Received benefits as a retiree and as a beneficiary.

For more information you may want to review - The Retiree FAQ section of the ERS website http://ers.ehawaii.gov (Retirees/Retirees FAQs) or - Information on the IRS website (http://www.irs.gov) such as IRS Publication 575, Pension and Annuity Income, the instructions for IRS Form 1040 U.S. Individual Income Tax Return

How is the IRS Form Organized? The 1099-R is a four-part form with instructions on the back of the form. Copy B is to be used in preparing your federal return. Retain Copy C for your records and keep it in a safe place for future financial purposes. You may disregard Copy 2, since all benefits received from the ERS are exempt from State of Hawaii income tax. If you are living out-of-state, you should consult a qualified tax preparer regarding the tax laws in your area.

Your 2016 IRS Form 1099-R will include the following information:Box 1- Gross distribution: Total benefit payment(s) the ERS paid to you in calendar year 2016 per IRS Distribution Code (in Box 7).Box 2a- Taxable amount: The taxable portion of your benefit payment(s) on this 1099-R.Box 4- Federal income tax withheld: The amount of federal income tax the ERS withheld from your benefit

payment(s), if any, during calendar year 2016.

Box 5- Employee contributions/Designated Roth contributions or insurance premiums: The portion of your gross benefit payment(s) not subject to taxes and the difference between Box 1 and Box 2a. This is the amount of after-tax contributions that the IRS allows you to recover tax-free for the year. Note: Box 5 is only applicable to certain retirees of the Contributory or Hybrid Plan who made contributions on an “after-tax” basis to the ERS.

Box 7- Distribution code(s): Denotes the type of payment you received. The IRS uses this code to deter-mine the proper tax treatment of your benefit payments.

The IRS Distribution codes used for payments made by the ERS include:1—Early distribution, no known exception (in most cases, under age 59½1/2). (Note certain distributions may be subject to an additional 10% tax.)2—Early distribution, exception applies (under age 591/2½).3—Disability.4—Death.7—Normal distribution.G—Direct rollover of a distribution to a qualified plan, a section 403(b) plan, a governmental section 457(b) plan, or an IRA.

Account Number: A unique number for each ERS 1099-R Form that helps identify duplicate forms if you request a reprint.

Important: The EUTF is a separate organization from the ERS. If you have any questions about information in these articles, please contact the EUTF directly. Contact information: 586-7390, 1-800-295-0089 toll free; Email: eutf@hawaii.gov

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REMINDERS JUST FOR RETIREES

News from the Hawaii Employer-Union Health Benefits Trust Fund (EUTF)

All retirees (and spouses/partners) enrolled in Medicare Part B should submit a copy of your letter from the Social Security Administration (SSA) or a copy of your invoice showing your monthly Medicare Part B premium for 2017. EUTF will reimburse the amount stated on your letter (less any penalties). If EUTF does not receive a copy of your SSA letter or invoice, your reimbursement will be the standard 2016 premium of $104.90 or $121.80 per month. For new Medicare Part B enrollees effective 1/1/17 and thereafter, the standard Medicare Part B premium is $134.00.

Medicare Part B Reimbursements for 2017 To that end, the EUTF Board recently added coverage of annual physical examinations to the EUTF non-Medicare and Medicare retiree HMSA medical plans, which were the only retiree plans without this benefit. Additionally, Medicare covers annual “Wellness” visits to your primary care provider. Generally, there is no cost to you if your provider is part of the network and accepts Medicare assignment. The annual physical examination includes routine hearing and vision tests, as well as certain screening tests. Your Medicare “Wellness” visit within the first 12 months of enrolling in Medicare includes a review of your medical and social history, and education and counseling about preventative services, including certain screenings, shots and referrals for other care. If you’ve had Medicare for over 12 months, your annual “Wellness” visit will include development or update of a personalized plan to prevent disease or disability based on completion of a Health Risk Assessment to assess your current health and risk factors. Contact your primary care provider to make an appointment for your annual Medicare “Wellness” visit.

REMINDERS FOR ACTIVE EMPLOYEES AND RETIREES

Beginning in 2017, all dependent children ages 19-23 will be required to submit a student certification annually upon their birthdate, to remain enrolled in the EUTF plans as follows:

Student Certification

• Active Employee dependents ages 19-23, must be full-time students, unmarried and living with the subscriber (unless boarding at college or as required under a Qualified Medical Child Support Order) to be enrolled in the dental and vision plans. Dependent children under age 26 do not need to be full-time students, unmarried or living with the subscriber to be enrolled in the medical and drug plans.*• Retiree dependents ages 19-23, must be full-time students, unmarried and living with the subscriber parent (unless boarding at college or as required under a Qualified Medical Child Support Order) to be enrolled in the medical, drug, dental and vision plans.

Student certifications must be submitted in the form of a letter from an accredited school, college or university, signed by the school registrar’s office, or a verification document from the National Student Clearinghouse.*This applies to the Active Employee plans only per the provisions of the Affordable Care Act.

Members paying out of pocket for their healthcare premiums (e.g., employees who are on leave without pay and retirees who are responsible for all or a portion of their premiums) can now pay their premiums through credit cards or electronic bank transfers. Fees for payments through credit card will be $2.50 plus 2.25% of the premium amount. Please visit the EUTF website at eutf.hawaii.gov.

Over the next year, the EUTF will be offering two additional methods of payment: 1) an automated, recurring electronic option free of charge – electronic bank transfers (automated clearinghouse or ACH payments) and 2) health benefit deductions from retiree ERS pension checks. Retirees who

Electronic Payment Options are responsible for paying all or a portion of their premiums will be notified by U.S. mail when the automated, recurring electronic option or ERS pension check deduction becomes available.

Your second vaccination shot for Hepatitis A is likely right around the corner. Your second vaccination should be six months after the initial shot. The full two-dose series of the Hepatitis A vaccine is the best way to prevent the Hepatitis A virus. Contact the provider that administered your initial vaccination to determine when your second shot is due.Please visit the EUTF website at eutf.hawaii.gov for information on your EUTF plan coverage.

Hepatitis A Vaccination

Please mail a copy of the SSA letter or invoice to the following address:

Or fax a copy to 808-586-2161

EUTFPO Box 2121Honolulu, HI 96805-2121

The EUTF and Medicare would like you and your depen-dents to have healthy, productive lives in your retirement.

Annual Visits to Your Primary Care Provider

Q: Who is my active beneficiary? A: Your active beneficiary is the individual(s) or entity (Trust, estate, etc.) you designated as a Hybrid or Contributory member that will receive your in-service death benefits. Certain life events such as marriage, divorce, or death can invalidate your beneficiary designation which will require you to designate another beneficiary(ies). It is very important to keep your beneficiary designation current. Noncontributory members are required to have their spouse, reciprocal beneficiary, or children under 18 as beneficiaries by statute. You can call our office to check on your current beneficiary designation or submit another ERS Form 1-A to update your beneficiary designation.

Q: I worked for the State and county for about 15 years from 1990 to 2005 and resigned to move to the mainland. I was a Noncontributory member and did not have any retirement deductions made from my salaries. Am I a member of the ERS and will I be eligible for a retirement benefit?A: If you earned at least 10 years of service as a Noncontributory member, you are a vested member of the ERS and will be entitled to a benefit upon reaching the eligible age for retirement. If you terminated prior to age 62 and had between 10 and 20 years of service you must wait until age 65 to retire. Upon approaching eligibility for retirement, you must contact the ERS office and file your retirement application between 30 and 150 days prior to your retirement date. Please refer to our website for information at ers.ehawaii.gov. You may refer to the Noncontributory information under the menus for Members > Leaving Employment or Members > Retirement Planning.

Answers to some frequently asked questions:Ask ERS

O‘ahu Office, Phone: (808) 586-1735Kaua‘i Office, Phone: (808) 274-3010

Hawai‘i Office, Phone: (808) 974-4077Maui Office, Phone: (808) 984-8181

Moloka‘i and Lana‘i,Phone (Toll free to Maui):

1-800-468-4644, ext. 48181Continental U.S. toll free to O‘ahu:

1-888-659-0708

201 Merchant Street, Suite 1400

Honolulu, HI 96813-2980

PRESORTEDSTANDARD

U.S. POSTAGEPAID

HONOLULU, HIPERMIT NO. 643

How to Contact Us

http://ers.ehawaii.gov

Holomua

ERS Board of Trustees:Vincent Barfield, ChairEmmit Kane, Vice Chair

Catherine ChanJackie Ferguson-Miyamoto

Patrick FraneWesley Machida

Colbert MatsumotoJerry Rauckhorst

Thomas WilliamsExecutive Director

Kanoe MargolDeputy Executive Director

Vijoy (Paul) Chattergy Chief Investment Officer

Monday-Friday 7:45 a.m. - 4:30 p.m.(Except State holidays)

ERS-Pension:For pension related questions,

please contact ERS at:

EUTF-Medical Coverage:For medical coverage and

Medicare reimbursements, please contact EUTF at:(808) 586-7390

toll-free at 1-800-295-0089or email at eutf@hawaii.gov

Retirees & Active Members

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