Comparing the Ohio PERS defined contribution plan to gold standards

Non-law enforcement and public safety public workers who enter the Ohio Public Employee Retirement System, or Ohio PERS, choose from two retirement plans: a defined benefit pension plan (the Traditional Plan) and the Member Directed Plan (MDP), a defined contribution plan. A hybrid defined benefit/defined contribution option (the Combined Plan) is no longer available and was closed to new entrants as of Jan. 1, 2022. 

This analysis uses the standards set in Reason Foundation’s Defined Contribution Plans: Best Practices in Design and Utilization to review the Ohio Public Employee Retirement System’s Member Directed Plan’s major design features and efficacy for employees’ retirement. Overall, Reason Foundation’s evaluation determines that the Ohio Public Employee Retirement System Member Directed Plan meets several best practices but needs improvement in other key areas, as described below.

Summary of the Ohio PERS Member Directed Plan

The Ohio PERS Member Directed Plan (MDP) is one of two retirement plan options currently offered to non-law/non-public safety eligible employees.

New employees can choose between the standard defined benefit pension Traditional Plan or the defined contribution Member Directed Plan. The choice must be made within 180 days of covered employment. If no election is made, the default plan is the defined benefit (DB) plan. Members may change their plan election once during their career, but the change is irrevocable. The Ohio PERS website indicates only about 3% of members have elected to participate in the MDP.

The Member Directed Plan is a participant-directed IRC Section 401(a) money purchase defined contribution plan. Employers contribute 14%, and members contribute 10.0% of their annual salary for a total 24.09% gross contribution rate. Of the 14% employer contribution, 7.5% is credited to the member’s MDP retirement account, 4% is credited to the Retiree Medical Account, .26% is allocated for administrative costs, and 2.24% is allocated back to the DB plan as a “mitigating rate” payment to reduce the unfunded liabilities of the Traditional Plan. 

The vesting schedule for new MDP members is 20% per year, with full vesting after five years. Employees who leave before achieving full vesting can take their contributions with them (with interest applied) but lose the unvested portion of the contributions made by their employer.

Importantly, Ohio PERS members do not participate in the federal Social Security program. This means the defined contribution plan (combined with personal savings) must provide enough to meet post-employment goals.

Best Practice Analysis of the Ohio Public Employee Retirement System’s Defined Contribution Plan

Definition of Plan Benefit Objectives

The objectives of the Ohio PERS DC plan are addressed partially in Ohio Revised Code Section 145.81- 145.99, which authorizes the Ohio PERS retirement board to create and administer the MDP program. Ohio Revised Code Section 145.81 allows but does not mandate the board to include a range of potential investment and benefit products, including life insurance, annuities, variable annuities, regulated investment trusts, pooled investment funds, and other investment forms. The authorizing statutes do not appear to provide any additional statement of plan objectives or purpose to guide the Ohio PERS retirement board in designing the MDP.

The Ohio Public Employee Retirement System retirement board has indicated on the PERS website that its mission is: “To provide secure retirement benefits for our members.”

The MDP plan document contains no formal benefits policy or objectives statement. 

However, the MDP’s current design reflects the board’s implied intent to provide members with various investment options and strategies and a significant emphasis on lifetime income options, as further described in this analysis.

Ohio PERS MDP Partially Meets Best Plan Objectives Best Practices

The Ohio PERS MDP partially meets the best practice standard that clear statements be made articulating the benefit objectives and purposes for the plan regarding retirement security and employee recruitment and retention. While retirement benefit security is indirectly addressed in the authorizing statutes, board policies, and the program design, there is no formal and clear statement that the MDP is intended to deliver lifetime retirement income to members and beneficiaries.  

Communication and Education

Ohio PERS provides thorough education and communication to eligible employees to help them choose their initial plan. They do this through benefit comparison charts between the plan options and benefit projection scenario calculators. Communication and education services include web-based resources, brochures, videos, summary plan descriptions (SPDs), group seminars and meetings, individualized counseling, and guidance offerings.  

The initial Traditional Pension vs. Member Directed Plan choice materials on the PERS website are primarily self-serve. New employees must review the PERS benefit projection modeling tools using their situations and potential future work paths. It is unlikely that some workers will be willing and able to effectively consider which plan is most likely to be best for them. 

The plan choice modeling tools are only accessible on the member-only PERS website. PERS webinar material, however, does indicate the modeling tools allow a member to construct a side-by-side comparison of projected lifetime income from each under different salary, retirement age, and investment gain scenarios. A separate comparison tool is provided for members who do not expect to stay an entire career and expect only a payment of the Traditional Plan refund amount or the MDP account value.  

The benefit plan comparison charts clearly outline what is provided and what is not under each plan choice and address the different retiree healthcare and disability benefits that exist under each choice.

DCP participants can access online and call center services to assist with managing their retirement, investments, and distribution planning.

Meets Best Practices for Education and Communication

The Ohio PERS MDP provides comprehensive participant education and communication materials and services covering all aspects of initial plan choice, accumulation period tracking and planning, investment management, and distributions during retirement.  

Note: The extremely low 3% selection rate of the Member Directed Plan raises concerns that members may not fully avail themselves of the plan selection resources. Generally, a higher percentage of younger and shorter-service employees would be expected to earn a higher total benefit under the defined contribution plan than the Traditional Plan. Thus, consideration should be given to automatically offering base-level working-career scenario projections instead of only on a self-serve basis.

Automatic Enrollment

New employees are automatically enrolled in the Ohio PERS program with a 180-day window to choose the Traditional Plan or Member Directed Plan. The Traditional Plan is the default for those who do not otherwise make the MDP selection. Those who choose the MDP have mandatory employee and employer contributions directed into an age-appropriate target date fund with the option for the employee to elect a variety of other investment approaches. 

Does Not Meet Best Practices on Enrollment

Requiring all new members to enroll in either of the two retirement offerings is consistent with best practices, but having the pension option as the default—the automatic choice for those who do not make an active choice within the required timeframe—nudges most new hires into a plan that does not best fit their needs. As it would better suit the mobile nature of the modern workforce, the DC plan should be the default for new hires.

Contribution Adequacy

Ohio PERS Member Directed Plan participants have a gross employer contribution of 14% of pay and a member contribution of 10% of pay. However, only 7.5% of the employer contribution is credited to the MDB investment account. 4% is allocated to the Retirement Medical Account, and the rest is allocated to administrative expenses or the “mitigating” amount to help pay off unfunded liabilities in the Traditional Plan. Because Ohio PERS members do not participate in Social Security, the total contribution rate of 17.5% (7.5% employer and 10% employee) is likely inadequate to fund a retirement benefit that would enable a retiree to maintain their standard of living following a career of employment. The 4% Retirement Medical Account (RMA) contribution helps offset this contribution deficit, but it is subject to a stringent vesting schedule of 10% vested per year beginning at six years of service until fully vested after 15 years of service. This vesting schedule effectively means most employees will not receive significant RMA benefits.

Does Not Meet Best Practices for Contributions

The total employer and employee contribution rate of 17.5% specific to retirement benefits (not health or legacy pension related) is below the best practice standard for non-Social Security employees of 18%-to-25% of covered compensation.

Retirement-Specific Portfolio Design

The Member Directed Plan offers participants a choice of a set of standard target date funds (TDF), a group of “standalone funds,” which includes five passively managed funds and one actively managed fund covering the following major investment classes: stable value, fixed income, large-cap equity, mid-cap equity, small-cap equity, and a non-U.S. equity index fund.   

The TDF options are offered in standard five-year age increments. The default investment is an age-appropriate target date fund if the participant does not choose a different investment.

This evaluation could not identify any investment advice or other asset allocation assistance tool for the standalone options. Such may be provided in the member-only part of the OHIO PERS website but was not identified in the publicly available elements of the website.

A Self-Directed Brokerage Account (SDBA) is also available, offering a selection of 5,000 mutual funds. Members must have a $5,000 minimum account balance to invest in the SDBA and may not invest more than 90% of their account balance into this account to ensure the member shares in supporting the administrative expenses of the Member Directed Plan. SDBA offerings are not typically offered in core defined contribution plans due to the higher investment costs with retail-level investment funds and because very few participants are equipped to properly invest their retirement assets to this degree. SDBA offerings are more commonly available in voluntary deferred compensation plans where only employee money is involved.  

The Member Directed Plan offers no accumulation period (deferred) or immediate annuity options.

Partially Meets Best Practices on Portfolio Design

The Member Directed Plan target date funds and standalone investment menus provide an appropriate range of investment choices covering the risk and return spectrum. The TDF offering includes pre-built target date accounts for those who prefer to avoid managing their asset allocation. If not otherwise available, consideration should be given to providing investment advice or guidance for the standalone fund menu. The SDBA is not considered a best practice for a core defined contribution plan.

Portable Benefits

Accumulations attributable to employee contributions are immediately vested. Accumulations attributable to employer contributions are not fully vested for five years. Vesting is on a pro-rated scale, beginning with 20% vested per year until full vesting after five years. The portability feature is strongly emphasized in the employee communication material and contrasted with the more stringent Traditional Pension vesting and refund rules.

Partially Meets Best Practices for Portability

Full and immediate vesting of employer contributions would be preferred to meet the needs of today’s more mobile workforce. The 20% per-year vesting schedule partially meets this best practice standard.

Distribution Options

The MDP makes various distribution options available, including monthly lifetime annuity payments, full refunds, partial lump sums, and combinations of annuity and lump sums. Retirement annuity benefits are generally payable after attaining age 55 with vested benefits. Full refunds are payable at any age after termination of covered employment. The MDP annuities include a cost-of-living adjustment feature based on a Consumer Price Index inflation benchmark.

Meets Best Practices in Distribution

The distribution offerings meet best practices by including standard lump sum and periodic payment options and, importantly, lifetime annuity options. 

Disability Coverage

Member Directed Plan members are not eligible for any disability benefit from Ohio PERS. The Traditional Plan does provide a disability allowance. Under the closed hybrid Combined Plan, a portion of the employer contribution is used to purchase a disability benefit. There is no similar provision under the MDP.

Does Not Meet Best Practices on Disability Coverage

The absence of a disability benefit is an important missing feature protecting participants in the MDP. One option is to allocate a portion of the employer or employee contribution for this purpose in the same manner as exists under the now-closed Combined Plan.

Conclusion

The Ohio Public Employee Retirement System Member Directed Plan, the defined contribution plan available to all newly hired non-public safety workers, meets most of Reason Foundation’s best practice standards for defined contribution plan design, particularly the focus on providing lifetime income solutions. Still, improvements should be considered in some areas, including:

• Higher total retirement account contributions to at least 18% of compensation;
• A default that nudges new hires to the retirement plan that will best serve the majority of entrants; 
• A shorter vesting schedule;
• Automatic benefit comparison and projection scenarios for new employees for making their initial plan choice;
• The standalone fund investment menu should be examined to ensure members are provided asset allocation investment advice and guidance;
• The SDBA offering should be reconsidered as an investment offering for a core DC plan, and
• A portion of the employer or employee contribution should provide a disability benefit for those who choose the MDP. 

For more information and an in-depth scorecard summary, please see Reason Foundation’s evaluation of the Ohio Public Employee Retirement System’s defined contribution plan.