There are many types of retirement systems, including defined benefit (DB) plans and defined contribution (DC) plans. In addition, states and local governments offer hybrid plans combining DB and DC features.
Whether you are a new or experienced state employee, understanding your retirement system is an important part of the process. This article will help you navigate your options, make informed decisions and understand the benefits that are available to you.
Defined Benefit Plans
A defined benefit plan is a type of pension plan that guarantees a specific benefit or payout upon retirement. These benefits are calculated using a formula that factors in years of service, age, and average salary.
Defined benefit plans are popular in the private sector and in certain government sectors, especially for federal employees. They offer a guaranteed income level during retirement, even if the investments in the plan don’t perform well.
Generally, defined benefit pensions are the primary retirement benefits of public sector workers, but not all states offer them. Some have only a defined contribution (DC) plan, and others have both DC and DB.
In some areas, the State’s defined benefit plan provides lifetime retirement, survivor, and disability benefits for employees and their beneficiaries. It is also the basis for RetireReadyTN, the State’s retirement readiness program.
The STRS Ohio State and County Employees’ Retirement plan began as a DC plan in 1964. It was then changed to a Cash Balance plan by the passage of LB687 on April 18, 2002.
The accumulated money in an employee’s account will reflect employer contributions, employee contributions (if any), and investment gains or losses. The benefit payable at retirement is based on the accumulated amount plus any forfeited employer contributions. Forfeitures include any employer contributions lost when an employee leaves before they have fully vested in the plan.
Defined Contribution Plans
Defined contribution plans, also known as 401(k)-style retirement savings plans, are an alternative to defined benefit pensions. These plans allow employees to save money through contributions from themselves and their employers and invest the funds. The amount you receive in your retirement account depends on how much you contribute and the performance of your investments.
Unlike pensions, defined contribution plans do not guarantee an income in retirement. They are usually financed by employee contributions and may offer limited investment options.
In addition, many of these plans are subject to vesting requirements, meaning that employees must remain at their employer for a certain number of years before they own the contributions made by their employers. This can make defined contribution plans less attractive to younger workers who want more flexibility in deciding how their retirement savings will be invested.
A major concern of the public pension community is the treatment of retirement accounts held by applicants for Supplemental Security Income (SSI). This program is a taxpayer-funded support program of last resort, designed to provide income after other resources have been used.
The basic policy of the SSI program for treating income and resources has remained the same since the first SSI payments were made in 1974. However, several approaches for changing this treatment have been developed.
Hybrid Plans
A hybrid plan is a type of state retirement system that offers both a pension and a defined contribution investment option. This combination of plans can provide governments with a compromise between the traditional DB or DC pensions and the 401(k)-style defined contribution investments that are typically found in the private sector.
The State of South Dakota is a notable example of a government that provides this kind of hybrid plan to its employees. The South Dakota Employees Retirement System (SERS) offers new members a plan that mostly looks like a pension but has many other features that make it a hybrid.
In addition to the guaranteed pension portion, the South Dakota Hybrid Benefit includes a 401(k)-style investment component. This is a hybrid type of plan because the money you earn from your investment options, the markets, and your employer’s contributions are the basis for your total retirement benefit.
Another critical element in a hybrid plan is the annual cost-of-living adjustment that is provided. This benefit is increased on a set date, usually January or July of each year, after at least nine months of receiving your pension.
Generally, the retirement process for hybrid plans is similar to other retirement systems. In particular, your application for retirement benefits and all related documents must be received by the State before your targeted retirement date. This is to ensure that the retirement forms are prepared correctly and that you have adequate time to review your retirement decision.
ERISA
ERISA (the Employee Retirement Income Security Act) is a federal law that aims to protect employee benefits plans from fraud and mismanagement. It covers many private-sector pension and health plans, including those offered by employers and unions.
Specifically, ERISA establishes reporting and disclosure requirements for employers, fiduciary standards, and vesting for pension plans. It also creates an insurance fund, the Pension Benefit Guaranty Corporation, to guarantee payment of retirement benefits in case of plan sponsor failure.
In addition, ERISA requires that all plan participants receive specific standardized information about their plans. This includes eligibility, fund matching rules, vesting guidelines, and other rules about withdrawing funds or receiving spousal benefits.
The law also requires that plan administrators act exclusively in the best interests of plan participants, with no conflict of interest. This means that plan managers cannot be responsible for determining whether an employee is eligible for benefits and for paying those benefits.
However, there are exceptions to this rule. For example, if an employee is found guilty of a crime and sent to prison, his or her retirement savings may be garnished by the government to pay the costs of the prison stay.
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