Monthly Archives: March 2017

Pension Reform Should Not Focus On All-Or-None Solutions

Remember the good ole’ days when retirement planning for most Americans involved income being illustrated as a three-legged stool where the legs of the stool represented 1) income from a pension, 2) Social Security, and 3) personal savings? The thought was that as long as the stool has three legs it will be strong enough to support the person sitting on it. Take one of those legs away, and the stool becomes much less stable. Take two of the legs away and you end up on your back.

So why is it that every time I read about pension reform the proposed solution is always an all-or-none scenario where the pension will be shut down in favor of individual 401(k) accounts? This solution completely removes one leg of the stool (the pension) and reduces the retirement readiness for everyone affected. At LAGERS, we believe everyone who works hard and plays by the rules deserves a secure retirement and that this is best achieved by the three-legged stool approach.

When 401(k)s were first conceived in the late 1970’s, they were never intended to replace pensions, but to supplement the pension plan while allowing employees to defer taxable income. This was originally a great concept – one that furthered the notion of the three-legged stool. But over time, employers have eliminated their pensions and gone completely to the 401(k). The supplement has now become the main retirement income vehicle for many Americans. And it isn’t working. Even if their employer offers a 401(k), two-thirds of Americans aren’t using it to save for retirement.

One of the reasons Americans aren’t saving more is because investing as an individual is hard. Nearly seven of ten Americans cannot pass a basic financial literacy test. The average American worker is just not equipped to know how much to invest, what to invest in, when to re-allocate, and then how to turn their savings into a lifetime stream of income. Also, many Americans simply don’t have the means to go-it-alone in 401(k) accounts. The recommended retirement savings rate for an individual without a pension plan is north of 10% of income. For low-to-middle income workers, this is a daunting, if not impossible task. Pension funds, on the other hand, are invested by professionals and benefit from pooling so that one individual is not taking on all of the market risks.

Watch: Pension vs. 401(k), What’s the Difference?

One argument for moving away from pension plans in favor of 401(k)s is that the individual accounts cannot create unfunded liabilities. This couldn’t be further from the truth. Both pension plans and 401(k)s can create unfunded liabilities. An unfunded liability is established when liabilities exceed assets. In other words, the money you owe is more than the money you have on hand. The presence of an unfunded liability is not necessarily a problem so long as there is a steady, predictable, and disciplined approach to making the required contributions. Individual savers create unfunded liabilities when they fail to save enough for their retirement. When more and more individuals enter into retirement without adequate savings and huge personal unfunded liabilities their only option to sustain themselves in retirement will be to seek public assistance.

The bottom line is this: we need pensions and we need 401(k)s (and similar programs). We should not be seeking solutions that eliminate any one leg of the stool, but rather, to make those legs work together to provide a more stable base for all Americans.

 

Jeff Kempker
Manager of Member Services

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Decoding your Member Annual Statement

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Very soon, you will be receiving your Member Annual Statement. While this piece of paper may not seem like much, it is a beneficial tool in your retirement planning arsenal. As you may know, your LAGERS retirement benefit will provide you with a secure stream of income when you retire. Coupled with your own personal savings, Social Security, and other sources of income, your LAGERS benefit will help you achieve financial independence when you decide to retire in the future. So, one of the first things that your annual statement may help you do is plan your retirement saving efforts by you knowing how much to expect from your LAGERS benefit.

Your annual statement gives you a wide range of information to interpret. So, I thought I would discuss some of the terminology on your annual statement

  • Personal Information will include your hire date, your date of birth, your vested status and your total years of service credit.
  • What you’ve earned as of December 31, 2016 will show how much you have earned as of the end of the year. In other words, if you were to terminate employment in the near future, this is approximately what your benefit would be at normal retirement age. Keep in mind, this amount is based on your service to December 31, 2016 and as you continue to work, you continue to earn months of service credit that will increase your future benefit.
  • What you could earn if you keep working will show you a projection of your LAGERS benefit if you work until your retirement age. This section shows you how remaining with your current employer under LAGERS will assist you in becoming financially independent in retirement.
  • Beneficiaries this is your current beneficiary(s) listed with LAGERS. If you need to update your beneficiaries, you can do so online through the myLAGERS portal or submit a Change of Beneficiary Form from our website.
  • Your LAGERS Account Balance will show your employee contribution balance including any contributions for purchasing service credit. If you do not make any employee contributions or have not made contributions at any time in your career, the balance will not be listed. This account balance does not have an effect on your benefit amount as your benefit is determined using a formula.
  • Your last 10 years of Salary Reported to LAGERS will show the last 10 years of wages reported to LAGERS. If you do not have 10 years of service under LAGERS, it will show what wages have been reported for the service you have earned.

 

Member Annual Statement vs. Benefit Estimate. The annual statement is an excellent way to understand what your LAGERS benefit will pay you in the future and a great tool to help you plan your retirement savings. However, another tool at your disposal when you near retirement is a benefit estimate. The benefit estimate has some similar functions to your annual statement, but it is a benefit projection based on an estimated retirement date you provide. Additionally, benefit estimates illustrate each of your available payment options, including the partial lump sum and what your potential beneficiary would receive with each option. You can generate and save benefit estimates on the myLAGERS portal 24/7. If you’re not signed up for a myLAGERS account, simply click this link and click “Enroll Now.” However, if you do not wish to have a myLAGERS account, you can have an estimate mailed to you by calling the LAGERS office at 1-800-447-4334.

So, the next time you look at your retirement savings plan, be sure to look at your annual statement to help you know what to plan on from your LAGERS retirement benefit. As always, if you have any questions regarding your statement or any other aspect of your LAGERS benefit, feel free to contact the LAGERS office!

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Jeff Pabst, CRC Senior Communications Specialist

 

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We’ve got the answers to your LAGERS’ FAQs!

When it comes to the employee benefit package offered at your employer, all that information can feel overwhelming. Every benefit has different rules, different enrollment periods, different ‘must knows.’   It’s enough to make your head hurt. We get tons of questions emailed to us every month from members wanting clarification on a part of their LAGERS benefit, so  I thought this month, I would take a survey of some of the most commonly asked questions. Hopefully this week’s blog can help simplify at least a few of your FAQs when it comes to LAGERS!

What happens to my LAGERS benefit if I quit?

It is quite common these days for an employee to have two or three different jobs (or more!) during a working career. It comes as no surprise that one of the most common questions we get at LAGERS is ‘what happens to my benefit if I quit?’

Here are a couple must-knows when it comes to changing jobs:

  • Vesting is important. Make sure you know whether you are vested when you leave because vesting is what determines your options for your LAGERS benefits when quitting a job.
  • If you are vested, you can go ahead and apply for a deferred retirement benefit if you don’t think you will work in the LAGERS system again. That way when you are age-eligible for your benefit to begin, the paperwork is mostly taken care of already!
  • LAGERS doesn’t need anything from you if you plan to change jobs and are moving to another LAGERS employer. You will simply complete a new enrollment form at your new employer and your benefit will continue to grow, it’s that easy!
  • Beware of the member contribution refund. While this may be the best option for some, refunding your member contributions results in a forfeiture of service credit. This means that if you take a job in the future with another LAGERS employer, your service starts back at zero, and it will take you 5 more years of work to vest in a new benefit.

Check out our blog on this topic to learn more!

Is my benefit taxable?

Yes, LAGERS benefits are subject to both state and federal income tax. However, there are some great tax benefits that LAGERS retirees may be eligible to take advantage of, such as the Missouri Public Pension Exemption. Visit our website to learn more.

What is pension funding?

You hear a lot of buzz about pension funding in the media. Simply put, a pension funding ratio is the measure of assets verses liabilities, or how much money is on hand to pay out promised benefits. It is important for retirement plans to properly fund benefits, so that when employees retire, there is money available to pay those benefits. Your LAGERS system has extremely sound funding policies, and as a system, is almost 95% pre-funded! LAGERS members can retire with the peace of mind in knowing that their hard-earned benefit will always be there for them.

Are their hardship withdraws in LAGERS?

No, LAGERS does not allow hardship withdraws or refunds of contributions to employees actively working in the system. Why? Because LAGERS takes those contributions and puts that money to work in the markets. Because over 60% of a member’s benefit is funded through investment return of the system, having your contributions working for you 24/7 is crucial making sure that we can guarantee a secure retirement in the future.

How do I update my address or beneficiaries?

Easy! Log on to your myLAGERS account and both can be quickly updated online. If you’d prefer the paper forms, here they are:

Don’t see the answer to your LAGERS’ FAQs?  LAGERS staff is always here to answer your questions.  Feel free to call or email our office to speak with a LAGERS representative today!

Elizabeth Althoff
Communications Specialist

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