While defined contribution retirement savings plans have been effective retirement tools for many decades, not all defined contribution plans are designed in a way that meets the needs of both employers and employees. There are a number of straightforward plan design principles, such as benefit portability and adequate contribution requirements, that when carefully incorporated into defined contribution (DC) plans, serve to create a sound retirement plan option.
The Florida Retirement System’s (FRS) defined contribution option—the FRS Investment Plan (IP)—meets many of the design principles defining a sound DC retirement plan. But a couple of critical factors are not met, however, and these factors need addressing for the Florida Retirement System’s Investment Plan to be an effective and adequate primary retirement vehicle for Florida’s state employees.
Certain best-practice principles are met by the FRS IP in its current form, including having a comprehensive communication and education plan for employees and retirees, automatically enrolling new employees into the plan, and recognizing the mobility needs of the modern workforce by providing for benefit portability.
While the investment menu—the established investment options that allow those less versed to select a basic strategy that works for them—in the FRS IP is low cost and diversified, it could be improved. The plan could also better address lifetime income needs for participants through annuity options and long-term disability provisions could be improved by the addition of a low-cost insured provision.
One major shortcoming of the FRS IP is common among many retirement plans. The objective of the plan, simply what it is striving to accomplish for its various stakeholders, is undefined. It is hard to design a retirement plan and then measure its effectiveness if its very objective is unclear. For the sake of this analysis, the objective of the FRS IP should be to provide for meeting employer workplace needs in the recruiting and retention of qualified workers, and for the maintenance of an employee’s standard of living, in combination with social security and personal savings, following a full career of employment. The objectives should further include that this benefit is provided in a cost-efficient way, and without the creation of unfunded liabilities, or debt. Ideally, the actual statement of objectives would be even more comprehensive and detailed than this, including specific income replacement goals and cost targets.
The biggest shortcoming of the FRS IP is the contribution rate. With a total contribution rate of just 6.3 percent (3 percent employee; 3.3 percent employer), the rate is, at best, no more than half of what is generally recognized to be an adequate contribution rate in a defined contribution retirement plan.
A total contribution rate of between 12 percent and 15 percent is accepted as necessary to reasonably meet lifetime income replacement goals when combined with Social Security and personal savings. Any retirement plan with a total contribution rate of just 6.3 percent will fail in achieving its primary goal— to provide a sufficient post-employment benefit.
If the FRS IP is to be successful as the primary retirement plan for Florida’s public employees, the first and most important change the state should consider must be an increase in the total contribution rate to bring it into the 12-15 percent range. This could be done by simply increasing the employee and the employer rate by 3 percent each, or by any combination getting to that necessary range. Other changes should be considered, but if the plan is to meet employer workplace needs and employee retirement needs, the contribution rate must be increased immediately.
Overall, the Florida Retirement System Investment Plan has a good foundation upon which to build a sound and effective modern retirement plan. A few changes, most notably to the contribution rate, would enable it to align with industry best practices and serve as an effective retirement vehicle for state employees.
Update – April 9th, 2021
The above is an analysis of the “Regular” Classification for FRS IP participants which covers the majority of those employees in the Florida Retirement System Investment Plan. Other classifications of employees in the IP receive different contributions from the state. Chief among these is the “Special Risk” classification which covers police, fire, corrections and certain other employees. Of the 1,224,162 active and retired FRS members, roughly 127,000 are classified as Special Risk. For these employees, the state contribution rate is 11 percent of their salary while the employee contribution remains at 3 percent. Contribution rates for Regular, Special Risk and other classifications are illustrated below:
|Employment Class||July 1, 2020 Rates|
|Special Risk Administrative Support||3%||4.95%|
|Governor, Lt. Governor, Cabinet Officers||3%||6.38%|
|State Attorney, Public Defenders||3%||6.38%|
|County & Local Elected Officers||3%||8.34%|
|Senior Management Service||3%||4.67%|
The FRS IP rate for the Special Risk classification and for Justices and Judges meets the industry best practice total contribution rate of between 12 to 15 percent. There appears to be a clear understanding within the FRS of what is needed to properly fund an individual’s retirement, given the rates already used for specific employment classes. If all classifications of employees had an employer contribution rate on par with the Special Risk or Justices and Judges classes, the plan would address its low contribution rate and become a solid choice for all state employees. It is also worth noting that for every employment classification the total contribution rates into the FRS Pension Plan far exceed the rates for the FRS IP.
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