LASERS Proposes New Rank-and-File Retirement Plan

Senate Bill 14 (SB 14), authored by Senate Retirement Committee Chair Barrow Peacock, sets forth a LASERS proposed plan for legislative consideration. It would apply to those rank-and-file members hired on or after January 1, 2020. Rank-and-file members hired on or after July 1, 2006, would be given a window to join the new plan for prospective service. Benefits for current employees would otherwise not be impacted.

The current plan available to LASERS new rank-and-file members is very different from the one that was in place for members hired before July 1, 2006.  Our research shows that the current plan will not provide retirement security for the vast majority of these new hires.  LASERS actuary has concluded that only five percent of members in our current rank-and-file plan for new hires will actually stay in the system long enough to receive an unreduced retirement benefit.  In fact, we expect that 70 percent will leave state service before retirement eligibility and receive only a refund of their employee contributions.

Employers are finding it very typical for this new generation to try different jobs rather than stay with the same employer for their entire career. This realization caused LASERS to explore whether a new plan could be crafted to better meet the needs of this new generation, while at the same time reducing the risk of future unfunded accrued liability (UAL). Our research led to the proposal for a retirement plan that combines the elements of both defined benefit (our current plan) and defined contribution (like a 401(k)) plans.

By reducing the risk of creating future unfunded accrued liability, SB 14 is an important further step in pension reform. It would provide a secure base benefit for employees with the defined benefit component. The defined contribution component would add a level of portability to an employee’s benefit that does not currently exist. For details on the plan, view the summary sheet.

If passed, the new proposed LASERS plan would provide retirement security for a new generation of retirees. It will have no negative impact on the sustainability of our System. On the contrary, the reduction of risk of future UAL will be beneficial to both the System and the State.

Frequently Asked Questions

Why is a new rank-and-file plan for new hires necessary?

A study of our current plan shows that new rank-and-file members are increasingly likely to change jobs.  In fact, 70% of these members will not stay in state service long enough to receive a benefit.  Instead, they will terminate employment and receive only a refund of their employee contributions.  During that state service, they will also not have earned any credit in Social Security.

Further, our analysis shows that only about 5% of our new rank-and-file members will receive a full, unreduced benefit.  The remaining 25% will receive a reduced benefit depending on their years of service and age at retirement.

What is the design of the proposed plan for new rank-and-file members?

A traditional defined benefit (DB) serves as the foundation of the proposed plan, which pays a guaranteed lifetime benefit. The proposed plan also includes a defined contribution (DC) component, which generates a benefit based on an investment account balance.

If I am an existing state employee will my future benefit be impacted if the new plan passes?

No. The new plan is proposed for LASERS new rank-and-file members hired after January 1, 2020. It will offer an option for our rank-and-file members hired since July 1, 2006, to join the new plan for future service.

Would the proposed plan jeopardize funding of current retiree benefit payments or cost-of-living adjustments?

No. The new plan has no impact on the funding of current benefits or COLAs.

LASERS is actuarially funded. Therefore, a retiree’s benefit is funded over the member’s working life.  LASERS is NOT a “pay as you go” plan like Social Security.

Does the new plan help pay off the unfunded accrued liability (UAL) of LASERS?

The new plan maintains the current, responsible payment plan in place to pay off the UAL. The total payroll for all LASERS covered employees is used when calculating how much the State must pay LASERS for the debt.  The payroll for members of the new plan will also be included.

Keep in mind, the structure of the new plan helps to reduce the risk of future UAL. That not only benefits the state, but increases the financial soundness of the retirement system.

Will closing the current rank-and-file plan negatively impact the financial soundness of LASERS?

No. LASERS already has at least a dozen closed plans.

What type of investment options will be offered to members of the new plan?

A third party administrator will be hired to manage the investment options. It is anticipated that members will choose from a stable value type account, target date funds, and a self-directed brokerage type account which offers investment freedom to the member. Or, a combination of these choices may be selected. Since the administrator has not yet been chosen, the specific choices are not yet known. However, members should anticipate choices similar to those offered in the Deferred Compensation Plan.

Does the new plan provide disability and survivor benefits if a member becomes permanently disabled or dies while in state service?

Yes, this new plan is designed to provide disability and survivor benefits that are similar to those provided in the defined benefit plan currently in place for members hired after July 1, 2015.

What is the retirement age for the new plan?

As introduced, a member must be age 65, with at least five years of service to be eligible to retire in the proposed new plan.

Alternatively, a member with at least 20 years of service who is at least age 55 may retire with an actuarially reduced benefit.

Do members of an existing plan who choose to join the new plan have to wait to age 65 to retire?

No. Members who choose to join the proposed new plan keep the retirement eligibility age of their existing plan, age 60 or age 62, depending on that plan.  They may also choose an actuarially reduced benefit with 20 years of service.

Does this plan apply to hazardous duty positions and judges?

No. The proposed new plan is only for rank-and-file members hired on or after January 1, 2020, or those rank-and-file members hired on or after July 1, 2006, who choose to opt in to the new plan.

Are there cost-of-living adjustments (COLAs) for retirees in the new plan?

Yes, COLAs are pre-funded in the new plan.  As proposed, retirees would receive a two percent COLA every other year after they are retired at least one year and are at least age 65. The system must be at least 65 percent funded for COLAs to be paid.

May members of the new plan take a loan from or borrow against the funds in their defined contribution account?

No.

If a new plan member leaves state service and requests a refund of their defined benefit component employee contributions, may the member leave their defined contribution account in place?

No. If a member requests a refund of contributions, they must refund from both components of the plan. A refund results in the forfeiture of any service that was earned.

Would contributions to the defined contribution component of the plan impact the dollar limit on contributions that may be made to the Deferred Compensation Plan?

No. The contribution limits for the Deferred Compensation Plan are independent from this plan.

Proposal Summary

PAR Report

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