What is a Defined Benefit Plan?
LAGERS is a Defined Benefit retirement plan. The primary purpose of a defined benefit plan is to provide income during retirement years. Retirees' benefits are permanent, protected, and based on a formula.
Facts About Defined Benefit (DB) Plans:
How are benefits determined?
Retirement benefit amounts are not based on a participant's account balance, investment decisions, or market performance. Benefits are based on a formula that provides a monthly benefit that is a direct reflection of the participant's actual career. Key components of the formula are length of service and salary.
How is a DB plan funded?
Defined benefit plans like LAGERS are funded through three sources: Employer contributions, employee contributions (if employer requires), and the investment return of the system. Investment return of the LAGERS system is the largest source of funding. LAGERS uses the 'level contribution method' which equalizes contributions between the generations. This way, retirement benefits are paid for by the time the member retires.
Who is responsible for investment decisions?
The investment return of the system provides approximately 60% of LAGERS’ funding. The rest of the funding comes from employer and employee contributions. LAGERS Board of Trustees is responsible for ensuring the system’s portfolio is invested to produce the best results for LAGERS members.
Who bears the investment risk?
If employee contributions are required by the employer, LAGERS member employees are always guaranteed to receive back everything they contribute plus interest. Since such a large portion of LAGERS' funding comes from investment return, this does have an impact on employer contribution rates. When LAGERS portfolio produces a return above what is assumed, the excess is credited back to employers. When the portfolio does not produce an excess return, upward pressure is applied to employer contribution rates to make up for the lack of funding.
What protections do employers have from skyrocketing contribution rates?
LAGERS does provide protections to employers from extreme rate increases. First, LAGERS statutes limit the annual increase in an employer rate to 1% unless the employer chooses to make a benefit enhancement. Also, annual investment gains and losses credited to employers are smoothed over a five year period to help protect against volatility in the rates.
What about plan fees and administrative costs?
Fees that are charged to defined contribution plan participants ultimately decrease the participant’s retirement benefit because they are often paid directly from plan assets. LAGERS is a non-profit entity and does not charge fees to employee members. Therefore, there is no decrease in retirement benefits because of fees. The administrative costs to run the system are paid from the investment returns of the LAGERS portfolio.
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