Reasons Why Employers Elect Less than 100% Prior Service

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When a LAGERS employer joins the LAGERS system, they make a one-time choice to cover all or a portion of the employees’ prior service. This is the service the employees’ have worked for the employer prior to it joining the LAGERS system. When an employer covers a portion of the service, this immediately reduces the employer’s contribution rate. However, it also permanently reduces the employees’ benefits. When an employer elects less than 100% of prior service, I have found that it is usually one of these two primary reasons:

They can’t afford 100%. Prior service cost is a portion of an employer’s contribution rate. The prior service portion of the employer’s rate is representing the employer’s unfunded actuarial accrued liability. This is the total present value dollar amount it costs to fund the employees’ prior service. When an employer covers less than 100% of prior service, this lowers the prior service portion of the employer’s contribution rate and therefore, lowers the unfunded actuarial accrued liability.

In these cases, the employer wants to do what’s best for their current and future employees, but they just cannot afford to provide 100% of prior service. They either can’t afford to pay the monthly contribution rate at 100% of prior service or they don’t want to take on a larger unfunded liability.  So, these employers join the LAGERS system at less than 100% prior service to ensure they are providing a secure benefit that they can afford now and into the future.

The employer already had a retirement plan they believe was sufficient. When an employer joins the system and they have a plan that is similar in purpose to LAGERS, they cannot grant prior service for as long as the previous plan was in place at its current levels. However, not all plans are determined to be similar to LAGERS and an employer must then grant all or a portion of the employees’ prior service. In this case, some employers believe that the plan they had in place before joining LAGERS was somewhat adequate and they believe that they don’t need to cover all of the employees’ prior service. Therefore, they elect to have a lesser portion of prior service covered because they have been paying into the previous retirement plan.

It may come as a surprise to most, but I have found that when employers elect lesser prior service, employees usually have very few issues with it. Their reasoning is that they are just happy that their employer is generously providing them with this benefit that will provide them with secure monthly retirement income.

So, employers have the flexibility to lower their financial commitment with a lesser prior service election and still provide the secure monthly income. Monthly retirement benefits, no matter how much, create a way for hard working individuals to leave the workplace with a little dignity and self-respect.

JPabst - reduced size

Jeff Pabst, CRC Communications Specialist

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