In our previous blogs, Let's Dive Into the Florida Retirement System and The Florida Retirement System Pension Plan, we learned more about the FRS and the opportunities the Pension Plan offers. Now, let's focus on the other major component of FRS: the Investment Plan.
The FRS Investment Plan (IP) is a “defined contribution plan,” which means that the current contributions are known, but the future benefit is not. Unlike the Pension Plan (PP), the IP offers no guaranteed monthly retirement benefit. Instead, employee and employer contributions are placed in an investment account, much like 401(k) plans offered by private sector companies. Once an IP member has worked for their employer for one year, they are vested, and when a vested member retires, they have access to the total of employee and employer contributions plus the earnings in their account. Depending on how well the member chose their investments, they may or may not have sufficient funds to maintain their current lifestyle in retirement.
FRS IP members contribute 3% of their gross earnings to their investment account each pay period. This mandatory contribution cannot be increased or reduced and is deducted from each paycheck pre-tax. Their employer also contributes to the employee’s account, but the percentage differs based on the employee’s job class. Here are the current contribution rates for the two largest job classes:
|
Membership Class |
Paid by Member |
Paid by Employer |
Total Contribution to Account |
|
Regular Class |
3% |
8.30% |
11.30% |
|
Special Risk Class |
3% |
16.00% |
19.00% |
Investment Plan members can choose how their contributions are invested. This can be a bit daunting to those unfamiliar with investing, especially since your investment choices now will determine if you have enough money to cover your expenses when you retire. Employees can choose from among nine investment funds, as well as from 10 target date funds that are based on the number of years until the employee’s retirement. If you don’t make an investment selection, your account will default to an age-appropriate Target Date Fund. Experienced investors can opt for a self-directed brokerage account, which will allow them to choose between thousands of investment options. However, this extra freedom comes at the cost of additional fees and increased risk.
Want to better understand how the Florida Retirement System and the Investment Plan? Download our free Journey to Retirement Flowchart to help guide you through the Florida Retirement System!
The amount contributed by the employer changes each year as dictated by the Florida Legislature; therefore, the total contribution to the member’s account may change each year. The actual amount paid to the FRS by the employer for each job class is much higher than the rates listed above, and the additional contribution is used to fund additional benefits and cover administrative costs. For instance, employers actually contribute 16.57% for Regular Class employees and 35.67% for Special Risk Class employees. Employer contributions for certain classes, such as Legislators, the Governor, State Attorneys, and Public Defenders, can run as high as 65% of their gross pay!
As briefly mentioned in my first FRS blog, an Investment Plan or Pension Plan member has a one-time opportunity to change from one plan to the other, known as a “second election.” In the case of a Pension Plan member switching to the Investment Plan, the member would obtain an estimate from the FRS of the lump sum value of their pension benefit. If the employee then agrees to proceed, the FRS will deposit that sum in an IP account for the employee, and they would lose any Pension Plan benefit they were previously entitled to.
In the case of an Investment Plan member switching to the Pension Plan, they would first obtain from the FRS an estimate of the cost to “buy in” to the Pension Plan. Then, they would determine if they had enough money in their IP account to cover the cost. If not, they would pay the difference out of pocket or abandon their plans for a second election. If they have more money than they need, then they can buy into the Pension Plan and keep the leftover funds in their IP account; this is known as the “reverse hybrid option.”
Another option, which is lesser known and seldom used, is known as the “hybrid option.” When choosing the hybrid option, the PP employee freezes their current PP benefit based on the years of service and average compensation up to that point. All future contributions then go to the Investment Plan. When they retire, they will have a limited pension benefit plus the assets in their IP account.
There are numerous considerations and risks when making FRS retirement decisions or taking advantage of the second election. Once these decisions are made, they are irreversible, and it's important to consider the long-term effects of your FRS decisions. It is critical to consult with a trusted financial advisor who is knowledgeable about the FRS prior to making any decisions that may harm or permanently affect your investments or your future retirement.
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.