Jeff Kempker, CEBS, CRC
Your employer recently received a report from LAGERS that shows how much they will need to pay for your retirement benefits beginning in 2017. This report is not very exciting to the average person, however, the folks in your finance and payroll departments undoubtedly look forward to this report so they can fill in another line on your organization’s budget.
The cost of your LAGERS benefits fluctuates slightly each year based on things like payroll changes, personnel changes, and economic factors. The amount your employer pays to LAGERS is different than other LAGERS employers because the cost is unique to your organization’s demographics and the benefits your board has chosen. The cost doesn’t necessarily reflect the amount of your retirement benefit, so why would this matter to you at all? Well, on one hand it doesn’t, on the other, it may matter a lot.
Why it doesn’t matter.
LAGERS is a defined benefit retirement plan, a traditional pension. This means that your retirement benefit is determined using a formula that is driven by how long you work and how much salary you earn. Your benefit is not based on an account balance nor is it determined by market forces beyond your control. Your employer is not putting a percentage of your salary into some account with your name on it. Rather, your employer makes monthly contributions to LAGERS to fund future monthly lifetime income for you and your co-workers.
If LAGERS adjusts your employer’s cost up, this does not mean you will receive a higher retirement benefit. Likewise, if costs go down, your benefit amount does not decrease with it. LAGERS benefits are always based upon a simple formula.
The cost for LAGERS benefits ebbs and flows but generally remains steady for long periods of time. Your employer is required by Missouri state law to contribute the full amount in order to ensure your benefit will be there when you are ready. LAGERS employers are extremely diligent in making these contributions because they understand the value of a secure retirement for you.
Why it does matter.
By now you are thinking, “OK, based on what I just read, I don’t need to care at all about what my employer is paying for LAGERS benefits because it’s no skin off my teeth anyway.” But, if we take a bigger picture view of all of this, there are some compelling reasons why it does matter to you.
Over the past four years, many LAGERS employers have made upgrades in their retirement benefits. Why? Simple, their costs have decreased. Often when this occurs, employers look to enhance benefits so that they may be more competitive in attracting and retaining good people to serve their community. Why have rates gone down? The majority of your benefit is funded by the investment return of LAGERS’ portfolio. When we do well investing your money, your employer’s cost decreases. When we don’t do as well, your employer’s cost may have to increase to make up the difference. LAGERS has historically done well in the markets and the past four years were better than expected. When the markets are performing well and employer costs are decreasing, this often triggers enhancements to your LAGERS or in other benefits. That definitely matters to you.
Now with the markets going the other way and retirees living longer, your employer is most likely going to be asked to pay in a little more to LAGERS in 2017 to make sure your benefits are properly funded. And they will, not only because law requires it, but because your future financial independence is vitally important.
Your LAGERS benefit is a significant investment by your employer and they take the funding of this benefit very seriously. So do we. While the cost of your benefit really doesn’t matter in the short term, it may matter a great deal to your overall financial security.
Jeff Kempker, Manager of Member Services