Jeff Pabst, CRC
At times, when employers are considering joining the LAGERS system, they are choosing to switch from their standalone defined contribution plan to a defined benefit plan with LAGERS. These employers are making the choice to give their employees the ability to earn and receive secure monthly income from LAGERS when they retire. As well, they are setting a plan in place designed to recruit and retain quality workers while providing dedicated employees a path to retirement security. When employers are thinking about making the switch, there are few things they need to know.
The defined contribution plan may be considered “similar in purpose.” When a prior plan is considered “similar in purpose” to LAGERS, it may limit or eliminate the employer’s ability to grant prior service.
While it may seem odd that a defined contribution account could be considered “similar” to the LAGERS defined benefit plan, it is possible. When determining whether or not a defined contribution plan is similar in purpose to LAGERS, we look for significant mandatory employer contributions, automatic universal coverage, mandatory employee participation and more. Before joining, a prospective LAGERS employer with a prior retirement plan will need to send its plan document for review to the LAGERS office.
Similar in purpose and uncovered prior service can be purchased. If an employer’s prior plan is considered similar in purpose to LAGERS or an employer elects less than 100% of prior service, employees can purchase this service on an individual basis. If the employer is changing from a defined contribution plan and the employee has assets in their personal defined contribution account, that employee can utilize those funds to complete the purchase of service. In fact, the employee can complete a direct rollover from his or her defined contribution plan into LAGERS to complete the purchase, and as long as the funds are transferred directly from the account to LAGERS, it will be a non-taxable transaction.
An employer can still have a defined contribution plan after they join LAGERS. A defined benefit plan like LAGERS is designed to replace a portion of an employee’s pre-retirement income. However, it is not designed to be an employee’s only source of retirement income. Instead, it is designed to be one piece of their retirement planning, and for an employee to achieve a secure retirement, that employee must properly save. The best way to enable employees to save is to make it as easy as possible through an employer-sponsored defined contribution plan. Otherwise, even with a pension, some people may have to delay retirement because they have not saved enough alongside their monthly income from LAGERS.
These are a few of the many details some employers are faced with when joining the LAGERS. If you or someone you know is considering having their employer join LAGERS, feel free to contact us with any questions or concerns you may have!
Jeff Pabst, CRC
Education & Outreach Coordinator
Missouri LAGERS
