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What is the difference between existing TRS retirement plan and 2018 proposed changes?

 

I was looking for an older post outlining the proposed changes to Kentucky's retirement system when I came across this website https://pensions.ky.gov/Pages/index.aspx. The site goes into great detail about the proposed changes to the teacher's retirement system. One link, in particular, caught my interest, it is a side by side comparison of the existing versus the proposed changes in the Pension Reform Bill.

The side by side comparison does a great job describing who will be affected, what their new contributions will be and at what time it will take effect. What it does not explain in simple terms is what is a 401a Money Purchase Pension Plan, how is it different than the existing pension plan and how it affects teachers?

The primary difference between the two plans is who takes on the investment risk. A defined benefit pension plan offers the security of guaranteed benefit/payout upon retirement for life or a set length of time. The employer (utilizing actuary to determine the annual funding) must determine the amount needed to fund employee retirement benefits and the investment risk of the retirement fund. The employer either benefits from market growth or is penalized for market decline.

A 401a Money Purchase Pension Plan is a defined contribution plan where an employer is required to make mandatory annual contributions to an employees individual account. There is no guarantee of retirement benefit. The only guarantee is the annual employer contributions. The employee is responsible for choosing investments and determining how much they will need to retire. Employee bares the investment risk and reward of the market.

The 2018 contribution maximum for both employer and employee is $55,000.

 Summary for Teacher

  1. New teachers will start in the 401a plan.
  2. Teachers with five years or less experience have a choice to stay in the pension or move their account balances into the 401a money purchase pension plan.
  3. Teachers that have more than five years of service will remain in the existing pension plan until they reach *max accrual benefit.
  4. Teachers that have achieved max accrual benefit have or as they meet max accrual benefit will automatically enroll in the 401a plan.
  • Teachers that have already achieved MAB will have option to contribute to TRS for 3 additional years.
  1. Healthcare benefits will be available after retirement and before Medicare if you have 2 years of service.

 What Should You Do?

  1. Wait and see what happens.
  2. Consider continuing to save money in supplemental retirement plans, (403b, 457, IRA and Roth IRA) additional savings will allow greater flexibility in retirement.
  3. Create financial plan for your retirement.
  4. Work with a financial professional to understand the details and create a personal financial plan.

*max accrual benefit is 27 years of service or age 60 with five years of service.

*This is not a comprehensive review of the reform bill. Please

 

Contact me to discuss further. You can book a call here.

 

Take a look at my 5 steps guide to financial planning

 

Thanks,

 

Chip Hill, AAMS®

Financial Advisor

Voya Financial Advisors, Inc.

155 W Bell Ct

Lexington, Ky 40508

Cell: 859.948.8717

[email protected]

chillfinancialplanning.com

 

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Disclosure:

All the information provided solely for educational information only.

The Pension Reform Bill has not passed, and any recommendation is purely subjective.

Please seek the advice of a financial professional to determine the best course of action for your specific situation.

TRS is the authority for all retirement benefit question; please verify any information with them before determining a course of action

 

Investment adviser representative registered representative of, and securities and investment advisory services provided through Voya Financial Advisors, Inc. (member SIPC).

 

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