So, you have been working for a political subdivision that has a LAGERS retirement plan. And you know that if you spend your career with your employer, you will receive a guaranteed lifetime benefit from LAGERS. But have you ever wondered how is this benefit paid for?
By design, LAGERS is a pre-funded pension plan. In general, this means that the money necessary to pay for a retiring member’s benefit has already been funded. Let’s break down LAGERS plan design and how an employer is able to pre-fund a member’s benefit over his or her career.
Your LAGERS employer pays monthly contributions into the LAGERS system and some of members also pay contributions into the system as well. Once the LAGERS system receives the contributions, they are set aside in a trust for the purpose of pre-funding the employee’s benefits. After they are set aside in the trust, we invest the monies in an attempt to earn a return on the money. This is done because without investment returns of the system, it would be unaffordable for any employer to pre-fund the entire amount needed for its group of employees.
Currently, investment return of the system provides approximately 65% of the funding needed for member and retiree benefits. In other words, for every dollar a retiree is receiving in a monthly benefit, .65¢ was paid for through the investment return of the system.
So, contributions are made and then invested in the markets. What happens to the funds when you’re ready to retire? When a member retires, we calculate an amount that is needed to pay your lifetime benefit. The amount is then drawn from your employer’s assets and placed in to a pooled fund from which all monthly benefits are paid.
This pooled fund is one of the strong plan design features of the LAGERS retirement system. One of its key functions is that it provides protection for you if you live longer than we expected. Some will live longer than expected while others will die earlier. However, the pool ensures your benefits are protected no matter how long you live.
In a nutshell, LAGERS receives contributions, places them in a trust for your benefit, invests the money to make the benefit affordable for your employer and finally, when you retire, transfers the amount needed for your lifetime benefit into a fund entirely for the purpose of paying monthly benefits. As you can see, pre-funded systems, like LAGERS, that have a solid plan design are the best way to ensure members’ retirement security for generations.