The Georgia State Employees’ Pension and Savings Plan (GSEPS) is the retirement plan for state employees hired on or after January 1, 2009. The savings plan combines two different types of retirement designs, consisting of both a defined benefit (DB) and a 401(k)-style defined contribution (DC) portion, making it one of a handful of states that use this hybrid structure. After more than a decade of new hires flowing into this plan, Georgia policymakers are reinforcing their commitment to making the hybrid plan a valuable and adequate benefit for public workers.
The goal of a hybrid plan is to provide an adequate benefit at an affordable cost—a fiscal policy that aligns with any retirement benefit. Reason Foundation’s Pension Integrity Project published best practices for hybrid plans earlier this year. As a compromise between defined benefit and defined contribution structures, hybrid plans, when implemented properly, offer policymakers a best-of-both-worlds blended approach.
The key consideration for structuring a good DC portion of a hybrid is the actual contribution going into the account. In combination with the guaranteed DB portion, this contribution must be sufficient to help workers plan for and sustain a healthy retirement. Until recent changes were made in Georgia, this was a weakness of the state’s hybrid plan.
Georgia’s state legislature recently approved a few changes to GSEPS that allow for a greater employer match in its DC portion. Specifically, the employer match contribution was increased from 3% to 5% of a worker’s pay. Moreover, plan members with six or more years of service will see an additional .5% per year, up to a maximum match of 9%. Employer matching contributions are subject to the plan’s vesting schedule; GSEPS vests 20% per year, reaching full vesting at five years of service.
As a best practice, employee and employer contributions to the DC portion must be sufficient to provide an adequate retirement benefit. For hybrid plans, contributions should be designed in a way that ensures members would get at least a 60% income replacement after 30 years of employment. When designing a plan, policymakers should keep in mind that if roughly 30% of the replacement ratio is coming from the DB plan, the rest should come out of the DC portion.
For Georgia, the combination of a pension plan and a fully matched 401(k) plan at the newly adopted levels will provide approximately 59% of an employee’s salary in retirement, according to the retirement system’s calculation. With Social Security benefits added, the total benefit could be 90% or more of a member’s final salary, assuming an investment return of 6% over 30 years and a 5% average contribution. For the sake of comparison, the nation’s average 401(k) matching contribution is approximately 3.5%, with only 10% of employers giving a matching contribution of 6% or more.
In addition to providing an adequate benefit, the creation of a hybrid plan has allowed Georgia to reduce the growth of its pension liability. According to a study performed by the Georgia Department of Audits and Accounts, without the creation of GSEPS, the retirement system’s unfunded accrued liability (UAL) would be $67 million (or 1.5%) higher than it is today and would have necessitated higher employer contribution rates.
Overall, Georgia’s recent change is a step in the right direction toward ensuring benefit adequacy for the state’s retirees. As it is now designed, the plan ensures that the existing liabilities are managed and a competitive retirement solution is offered. Georgia’s plan strikes a proper balance of risk between employees and employers, provides retirees with secure and predictable retirement, and offers the flexibility they need to get the most out of their retirement contributions.
Stay in Touch with Our Pension Experts
Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.