Jeff Kempker, CEBS, CRC
Investing in the markets is unpredictable. None of us has a crystal ball or any other super power that allows us to know, in advance, all of the factors that influence particular investments to rise or fall. There are risks when we invest our money. We can make extremely well-educated decisions, hire the best and brightest people to help us to diversify our assets, but we can’t completely remove the risks. Manage the risks, absolutely. Remove the risks, not a chance.
As a member of LAGERS, you don’t have any investment or market risk related to your LAGERS retirement. Even if you contribute a portion of your paycheck to LAGERS, you are always guaranteed to receive back at least the amount you paid in. In other words, you cannot lose money by contributing to LAGERS. This, very basically, means that your retirement benefit is not affected by the ups and downs of the market. Your benefit is based on a formula, not an account balance that ebbs and flows based on economic forces beyond your control.
So, who takes on the investment risk? I mean, LAGERS does invest every dime we collect from our members and employers. And we know that we cannot remove the risks of investing. The risk has to be attributable to someone, or something.
The answer is that LAGERS participating employers take on the investment risk for their employees. They are trusting LAGERS to invest prudently and to earn the highest possible returns for members. When LAGERS’ investments perform better than expected, your employer’s cost for benefits may be lowered. If the markets aren’t so kind, your employer may have to pay a little more into LAGERS to make up for lackluster investment performance. That’s how it works.
LAGERS takes the investment of our members’ and employers’ money very seriously. For us, the main financing goal is for all benefits to 100% funded. This means that we must collect the appropriate level of contributions year after year. Costs for benefits are designed to remain level for decades, and they do, for the most part. During challenging market cycles, costs can and will increase. However, LAGERS rules provide some protections for employers so costs can stabilize.
For one, any investment gain or loss by LAGERS in a given year is smoothed out over the next five years. This helps soften the blow during down market years and keeps costs more level during the good years. Second, costs are limited to no more than a 1% annual increase. For example, if an employer is paying 10% of payroll for LAGERS benefits in 2016, they know their costs will not be more than 11% in 2017 unless they choose to make a benefit enhancement. This doesn’t mean that costs automatically increase 1% each year, this just means that they cannot increase more than that. These rules make budgeting for LAGERS much easier while ensuring your retirement benefit will be properly funded.
Risks are everywhere. As a LAGERS member, it should give you great comfort knowing that your retirement income is protected from market swings and that your employer is insulating you from investment risk related to your LAGERS benefit.
Jeff Kempker, Manager of Member Services