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Defined FRS Benefit Retirement Plans vs. Defined Contribution Retirement Plans

charitable_remindar_trustA defined FRS benefit retirement plan (pension plan) is an employer-sponsored retirement plan where the employee benefits are sorted out based on a formula using factors such as salary history and duration of employment. In the case of an FRS employee who was hired prior to July 2011, the formula uses the years of creditable service, five highest years of average final compensation and an interest credit. The interest credit is generally 1.6% if you have fewer than 30 years and are younger than age 62 (assuming the employee was hired before July 2011). The investment risk and portfolio management are entirely under the control of the employer. The employee benefits in most traditional defined FRS benefit retirement plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation.

A defined contribution retirement plan (investment plan/second election) is a retirement plan in which a certain amount or percentage of money is set aside each year by the employer for the benefit of the employee. There is no way to know how much the plan will ultimately give the employee upon retiring. The amount contributed may be fixed, but the ultimate benefit to be received is not. The investment risk and portfolio management are entirely under the control of the employee.

Most employers outside of the Florida Retirement System have been cutting out defined benefit retirement plans for reasons such as cost and regulation burdens. Rather than having a defined benefit plan, many employers turn to the defined contribution plan, which is a 401(k) style plan. In general if a company decides to go from a defined FRS benefit retirement plan to a defined contribution retirement plan, the defined benefit retirement plan would be frozen and employees that are entitled would still receive some form of benefit at the time of their normal or early retirement.

Will the Florida Retirement System get rid of the defined benefit retirement plan for new hires? You might be asking how this potential change will impact you and the way in which you will retire from FRS. At Silverman Financial we specialize in helping FRS members sort through the complex world of retirement planning. If you want to specifically know how these changes might impact you, please call us for a no obligation consultation. We look forward to speaking with you.