Monthly Archives: July 2014

What is a Funded Status and What Does it Mean for MY Retirement?

SavingsIf you have ever read a story in the news on the health of a pension fund, you’ve most likely already heard about funded statuses (or ratios). This measurement of pension health is obviously important, but for many, it can seem a bit abstract. Trying to decipher what the number means, is the number good, should I be worried, are all overwhelming questions to say the least.

Simply put, a funded status is the measurement of assets versus liabilities, or how much a pension fund has on hand today to pay for benefits promised in the future. For example, let’s say LAGERS promised $100 worth of benefits to be paid in the future, but only currently had $90 in the bank. At that point in time, you could say LAGERS is 90% funded.

So why do we talk about funded status? At some point, members of a pension fund are going to retire and begin drawing monthly retirement checks. A system with low funding levels may not have the funds available in the future to pay for all its promised benefits, which is a big problem. A well-structured pension fund should always be working toward achieving 100% funding to ensure they can pay for promised benefits in the future.

There are many factors that can affect how well a plan is funded. For LAGERS, it starts with ensuring that we’ve calculated employer contribution rates appropriately. LAGERS’ actuaries re-calculate these rates every single year to ensure that employers are funding benefits at the appropriate level over time. The next step is to require that every employer makes their full contribution each month. LAGERS statutes mandate employers to do this, leaving no wiggle room for an employer to not pay simply because they choose to budget less than the required amount.

With that said, you may still be wondering if you should be concerned that LAGERS isn’t 100% funded. A funding ratio is a snapshot measurement of the system’s assets and liabilities at one point in time. While this alone can give insight to a pension’s financial solvency, perhaps an even better measure would be to look and at how the funded status has trended over the past several years.

The rate that LAGERS’ employers pay is based on many assumptions, for example, investment return.   If we hit every assumption exactly each year, LAGERS would eventually reach and stay exactly 100% funded. The fact of the matter is that no matter how smart our actuaries are (and they are pretty smart), no one can completely predict the future. That’s why the funded ratio can fluctuate. The important thing to remember is that as long as employers are making their required contributions, LAGERS funded ratio should generally trend toward 100% over time, and that’s a great thing! In the meantime, remember that not all LAGERS retirees are going to retire on the same day, meaning LAGERS won’t ever have to pay out all promised benefits at once.

At almost 92% funded, LAGERS continues to show steady improvement toward 100%. Amazingly enough, LAGERS partners with new employers every year who enter the system with no assets (0% funded). Despite this, LAGERS’ strong plan design, with the help of outstanding investment returns over the past several years have helped place LAGERS as one of the top-preforming pension funds in the nation. What does this mean for you? Hopefully the peace of mind in knowing that your retirement benefit is secure and will be there for you when you retire, whether that’s tomorrow or 30 years from now.

Elizabeth Althoff Public Relations Specialist

Elizabeth Althoff
Public Relations Specialist

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Thinking about leaving employment? LAGERS has options.

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Have you considered leaving employment, but are afraid that your LAGERS retirement benefit won’t transfer? If you make the difficult decision of leaving LAGERS covered employment, you have several options available for how your LAGERS benefit can be handled.

  • Refund of Employee Contributions – if you terminate employment, vested or not, you may elect to receive a refund of your employee contributions after you leave employment. This is not an option for you if your employer didn’t require contributions from you or if you are eligible to draw a monthly retirement benefit.

When you receive a refund of your employee contributions, it forfeits any future benefit payable to you. However, a refund of contributions may be reinstated if you return to LAGERS covered employment and redeposit the contributions you received plus interest.

  • Present Value Lump Sum – if you are vested, have less than 10 years of service and are more than 10 years away from your normal retirement age, you may receive a present value lump sum of your monthly benefit upon leaving LAGERS covered employment. When you receive a present value lump sum, your benefit is considered exhausted and there is no longer a future monthly benefit payable. Also, your future monthly benefit cannot be reinstated once you receive the present value lump sum.

If you choose, LAGERS can directly roll the funds over to another retirement account that you own. By doing this, you will delay immediate taxation and avoid any early distribution penalties.

  • Deferred Retirement – if you are vested when you leave employment but not yet retirement age, you may elect to defer your monthly retirement benefit to your normal retirement age. By doing so, you would ensure a steady stream of income during your retirement years.

If you choose, you may begin to draw your deferred monthly retirement benefit up to five years earlier than your normal retirement age. However, the benefit will be reduced by 6% (one-half percent per month) for each year you are younger than your normal retirement age.

  •  Normal Retirement – if you are vested and have attained your full retirement age, you may begin receiving your monthly benefit once you leave LAGERS covered employment.

So, if you are thinking about leaving LAGERS covered employment and are worried about your LAGERS benefit. Don’t sweat it – your LAGERS benefit provides you with several options.

Jeff Pabst, CRC Public Relations Specialist

Jeff Pabst, CRC
Public Relations Specialist

Why Retiring Before October 1st Isn’t as Important as You Think

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How much do you know about LAGERS’ cost of living adjustments (COLAs) after you retire?  If all you know is what you have heard from your buddy Joe, who retired last year, you probably have heard about a magical October 1st date.  According to Joe, if you choose to begin drawing your LAGERS benefit after October 1st, you will be leaving a lot of money on the table.  And since Joe is an expert in matters of LAGERS retirement plan provisions, you are inclined to believe him.  So in preparing for your retirement, you stress about the looming October 1st date to ensure everything is in order to retire before the first leaf falls.  Is all of this stress over a measly little date necessary?

Joe is right that October 1st has some significance to LAGERS cost of living adjustments.  Here are the facts:  LAGERS’ Board of Trustees is allowed to grant a COLA to retirees each year, provided the system is financially healthy enough to do so.  And since LAGERS’ Board is always extremely focused on the financial security of the system, COLAs have traditionally been given each year.  The amount of the COLA is based on the Consumer Price Index (CPI), which is a measure of inflation, and benefits are adjusted each October 1st.

Here is the part Joe is referring to:  In order to be eligible for your first COLA, you must be retired for 12 months including an October 1st.  Meaning if you retire October 1, 2014 you will receive your first COLA on October 1, 2015.  If you retire November 1, 2014 you won’t receive your first COLA until October 1, 2016.  But there is a very important detail that Joe is missing.

If you miss out on a COLA one year because of your retirement date, don’t sweat it.  When you receive your first increase, you are going to get a little more than everyone else.  That’s right.  LAGERS is going to catch you up for the COLA you missed out on the year before.  LAGERS’ COLAs are cumulative, which means we want all of our retirees to have 100% purchasing power with their monthly benefit.  And as of October 1, 2013, all 17,000 LAGERS retirees were officially restored to 100% of their original purchasing power.

Speaking with LAGERS members over the last 10+ years I have heard this October 1st concern time and again.  After all, timing is everything in retirement planning and choosing your retirement date to maximize your benefits is always a good idea.  However, if you chose to worry about the October 1st deadline at all, perhaps consider it the last item to check off your ‘retirement-to-do-list’.  Don’t worry, we’ll catch you up.

Please share this with Joe and all the other October 1st conspiracy theorists out there.

Jeff Kempker, RPA, CRC

Jeff Kempker
Manager of Member Services

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