Jeff Kempker, CEBS, CRC
Photo by rawpixel.com on Unsplash
Flexibility may not be a word you often hear associated with public pension plans. These plans are typically created by state or local policymakers, and changes to the plan structure are sometimes difficult and time-consuming. This is OK for many public pension plans because they cover workers with similar characteristics. It is common, for example, for all teachers covered by a pension plan to have the same retirement benefits regardless of the school district that employs them. All employees have the same benefits; the school districts and employees share in the cost of benefits; and all pay the same amount for those benefits.
This is not how LAGERS works.
There is much diversity among local government employers. LAGERS covers librarians, firefighters, utilities workers, administration, police officers, public works, and more. It makes sense, then, that we would offer diversity in our benefit offerings as well.
LAGERS has around 100 different combinations of benefits that are chosen by local boards of each government unit. The control over the benefits resides at the local level, where those closest to their citizens can make decisions based upon their goals and budgets. In fact, the flexible options allow for substantial creativity in the level of benefits and the sharing of cost between employee and employer.
Sharing Cost Between Employer and Employee
Each local government participating in LAGERS may choose to pay the entire cost of benefits or to share the cost with the employees. If the employer chooses to share the cost, each employee is required to contribute 4% of their monthly salary to LAGERS. The employer, then, pays the remaining cost of benefits above the employee contribution. Each employer can switch to the 4% required contribution or eliminate the employee portion once every two years. Sometimes employers switch to a required 4% contribution from employees and at the same time upgrade the level of retirement benefits. This helps offset the employer’s cost for the upgrade.
Maximizing the LAGERS Benefit
Some employers choose to maximize their LAGERS benefits. This can accomplish a couple things: help attract and retain quality workers and then enable those workers to retire on time and avoid the costs associated with delayed retirements. Over the last ten years, there has been significant movement to the 2% multiplier among LAGERS employers. This is the highest benefit level for employees who are covered by Social Security. Employers making this move often cite the need to compete with other entities for good workers and to help employees retire when they should. There are real costs to an employer when employees stay on the job too long, and maximizing the LAGERS benefit is one way to encourage movement within the workforce.
Integrating with Social Security
One distinct advantage of a defined benefit pension plan, like LAGERS, is that it is easier to integrate with Social Security. An employer can target a specific income replacement rate they believe will produce an adequate retirement benefit. Then, they can use the projected Social Security benefit plus the projected LAGERS benefit to get to the desired replacement rate.
For example, the estimated monthly Social Security benefit beginning at age 67 for a worker earning an annual $40,000 salary is around $1,242, or $14,904 per year. This Social Security benefit replaces 37.3% of the person’s salary. Knowing this information, an employer can determine how much income the LAGERS benefit should provide to meet their desired target.
If the same employee from the example above retired from LAGERS with the 1.5% multiplier and 25 years of service, they would receive $1,250 per month or $15,000 per year from LAGERS. This would be an income replacement rate of 37.5%. So, with Social Security and LAGERS combined, the retirees will enjoy lifetime retirement benefits that replace about 75% of their working salary. If the employees desire a higher income replacement rate, they have the choice to save money on their own or work longer to increase their benefits.
Integrating with a Defined Contribution Plan
Another option for local government employers is to integrate the defined benefit pension provided by LAGERS with a defined contribution plan outside of LAGERS. An employer could choose, for example, to provide a low-to-middle LAGERS benefit level, decide whether or not the employees will contribute toward that benefit, and provide automatic enrollment with matching contribution into a defined contribution plan.
This approach provides a modest amount of guaranteed lifetime income combined with an investment account that is managed by the employee. If the employer wants to adjust the guaranteed income portion up and the employee investment option down, it can do that. If the employer wants to provide a lower amount of guaranteed income and a higher match to the employee investment account, it can do that as well.
With any of the above options, it really comes down to what an employer is trying to accomplish with their overall benefit package and how retirement plans fit into that package. LAGERS provides incredible flexibility that enables each local government employer to design retirement benefits that best suit their needs and budgets.
