Congratulations! Regardless of where you're at in your career, you're on your journey to retirement. Some may be just weeks away from their final days, while others are just beginning their journeys. Regardless of where you're at on your path, there are decisions all along the way that will affect your retirement plans. It's important to make the best decisions to set you up for the retirement you want. Now, what's the best way to do this? By diving into the Florida Retirement System and understanding your options, plans, and when to make the critical decisions that support your goals. Like every good journey, we need to start at the beginning. So, what is the Florida Retirement System?
What is the Florida Retirement System?
The Florida Retirement System (FRS) is a state-sponsored retirement plan that provides retirement benefits to employees of the State of Florida, State universities, Florida school districts, and counties. Additionally, cities, special districts, charter schools, housing authorities, and independent hospitals have the option to participate in FRS as well. Over 1,000 employers in Florida participate in the Florida Retirement System and employ over 629,000 active FRS members (This number reflects current members still employed, not those who have retired or entered DROP.) As of June 30th, 2022, FRS had over $180 billion in net assets.
The FRS consists of two primary components, the Pension Plan and the Investment Plan. FRS also operates several optional retirement programs for eligible employees in certain positions, but during this article and those to come, we'll be focusing on the Pension and Investment Plans — which account for 97% of FRS plan participants.
Who does this affect?
As previously stated, over 1,000 employers participate in the Florida Retirement System Program. This includes state employees like legislatures, governors, judges, and more, to public school teachers and employees, state police officers, water management employees, and more. To see a full participant list, click here.
All FRS participants, either Pension Plan or Investment Plan, are assigned to one of five job classes based on their job assignment, (1) Regular Class – teachers (2) Special Risk Class – officers, fire fighters (3) Special Risk Administrative Support Class, (4) Elected Officers’ Class, or (5) Senior Management Service Class. The class a participant is assigned is important because it affects their retirement age/years of service and their benefit upon retirement. Most active members, 86.6%, are Regular Class employees with Special Risk Class accounting for 11.6%. The <2% remaining are assigned to one of the other three classes.
Upon entering employment with an FRS participating agency, new members can elect to participate in either the Pension Plan or the Investment Plan. If they do not choose a plan, those in Special Risk Class jobs will default to the Pension Plan, and all others will be placed in the Investment Plan. All Pension and Investment Plan participants make a mandatory 3% of gross income contribution to the plan. The contribution is pre-tax and is deducted directly from their pay. FRS employers are also required to contribute to the plan for each employee, based on their job class. The amount is updated each fiscal year and ranges between 9.1% and 36% of the employee’s gross pay for most members. While your interest may have peaked at those high percentages, not all of that is invested into the employee's retirement. The employers forward their contributions and the contributions from their employees to the FRS to fund the payment of benefits, as well as administrative costs.
Want a guide to help you understand the Florida Retirement System? Our Journey to Retirement Flowchart maps out your route to retirement. Click the button and download it for free to help you better understand this article!
What is the difference between the Pension Plan and the Investment Plan?
The FRS Pension Plan is a “defined benefit” qualified retirement plan. Retirees will receive a lifetime monthly benefit which is determined by a formula based upon their Average Final Compensation (average annual earnings), years of qualifying service, and a multiplier determined by their job class. In lieu of a lifetime benefit for themselves, retiring members may choose an optional benefit plan which pays a benefit if the member or their spouse is alive, but this usually results in a lower current monthly benefit.
The FRS Investment Plan is a “defined contribution” plan that operates much like a 401(k). The participant’s 3% contribution and a portion of the employer’s contribution are deposited into an investment account for the employee’s benefit. Participants choose how to invest their money from among nine investment options comprised of FRS proprietary mutual funds. More experienced investors can also participate in a Self-directed Brokerage Account, allowing them to choose from among thousands of investments. Unlike Pension Plan participants, those who choose the Investment Plan do not have a guaranteed monthly benefit upon retirement. They will receive the current value of their investments upon retirement, which may or may not be sufficient to fund their retirement income needs.
Does FRS provide any opportunities to change your plan?
What if a member changes their mind and wants to change from the Pension Plan to the Investment Plan, or vice-versa? Members are offered a single, irrevocable opportunity, known as the “second election,” to change from one plan to the other. But, there are risks associated with making such a choice, and members should consult a trusted financial advisor first.
In upcoming articles, we will dig deeper into the Pension and Investment Plans and the advantages and disadvantages of each. Stay tuned, and if you have specific questions concerning your pension choices, give me a call at (863) 688-1725 or email me at Rick@cpsinvest.com.
About Richard
During his time in public service, Rick was dismayed at the number of people, including other public servants, who failed to plan for retirement and ultimately made poor financial decisions when it was time to retire; many were ultimately forced to return to work. Realizing that sage and timely advice from a financial planning professional could have prevented these unfortunate outcomes, Rick was determined to pursue a second career helping people plan for and achieve a financially secure retirement.
