Military Update: 4 changes, 4 courses eyed for 'blended' retirement
As many as 2.4 million active-duty and reserve component members, roughly 75 percent of the total force, will be invited in 2018 to switch to the new “blended” military retirement plan that Congress approved last year.
To prepare for that “open season” year, to strengthen force retention and to bolster retirement savings, Defense Department officials are asking Congress to make four significant changes to the new retirement plan.
And to ensure the military community is well-informed about the momentous decision at its doorstep, officials will launch four separate education courses on the blended plan by 2018, explaining its features against the current High-3 plan, which is less accessible but more valuable.
The new plan is described as blended because it combines an immediate reduced annuity after 20 or more years with a Thrift Savings Plan (TSP) that features government matching of member contributions up to 4 percent of basic pay.
Because the enhanced TSP will be a portable 401(k)-like plan that benefits the vast majority of members who leave short of 20 years, blended retirement is expected to be a popular switch. Eligibility is limited to active-duty personnel with fewer than 12 years’ service as of Dec. 31, 2017, and to Reserve and National Guard members with fewer than 4,320 retirement points. The belief is that longer-serving members won’t have enough time left to build TSP nest eggs large enough to make the blended plan seem fair.
Current force members not eligible for or enticed by the blended option will stay under the High-3 plan, which pays 20 percent higher annuities than the blended plan to those who complete 20 years or more.
If having to choose between plans seems daunting right now, Jeri Busch, director of military compensation policy for DOD, believes many minds will be eased. By 2018, she said, members should be well-armed for the decision, with plan details and TSP options explained, web-based tools available to calculate and compare plan values under various assumptions, and financial advisers on base ready to help.
In an interview, Busch and Pat Mulcahy, assistant director for retired and annuitant pay, described implementation milestones for the new retirement law. Regulations are being drafted and system changes coordinated with the Defense Finance and Accounting Service and by the Federal Retirement Thrift Investment Board, which administers TSP for federal civilians and military members. Nearly 45 percent of current members already have TSP accounts and know the investment options.
A critical separate effort is focusing on educating the force on the new plan, Busch said. Four courses will be launched before the blended retirement kicks in for all new entrants and becomes an option for younger members now serving.
The first course to be rolled out by early summer will give an overview of the new plan to military leaders, officer and enlisted. The second course available by early 2017 will educate members eligible to opt in and “include a set of tools to help compare and contrast the current system to the new system,” Busch said. Members will be able to compare lifetime values of the blended plan to High-3, plugging in assumptions like rate of return on TSP investments and expected inflation.
A full list of variables is “what we’re still working on,” Busch said. “That’s why we need a year to get this tool ready.”
One key factor for TSP performance will be funds selected. New entrants who don’t know what fund to choose will see contributions go into a 2050 Life Cycle Management Fund where the mix of assets is appropriate for someone planning to withdraw retirement money in 2045 or later.
A third education course will be for new entrants, explaining features of their retirement plan. The last course will be a more technical explanation of blended retirement for personal financial managers and retirement service officers on bases worldwide so they feel more confident advising members.
Because no one can opt into the new plan until 2018, military folks will have all of 2017 to learn its details. The details might still be changing. Defense officials are urging Congress to make four important adjustments.
The top priority is to give the services flexibility over a “continuation payment” approved as a third key feature of the blended plan. Current law mandates that it be paid at 12 years of service and equal at least two-and-half months of basic for active-duty members who agree to serve four more years. Reservists would get at least one half month of active-duty pay.
Defense officials want the continuation payment to be solely a retention tool with no restrictions on amount, when paid or to whom.
“We don’t view it as a component of the blended retirement,” said a DOD official. But it will be touted as a plan feature if not changed.
A second change sought would raise government matching of TSP contributions from 4 percent of basic pay to 5 percent as originally proposed by DOD and by the Military Compensation and Retirement Reform Commission. Congress cut the match during late-hour negotiations last year, reasoning it should equal the formula used for federal civilian employees.
What lawmakers failed to recognize, DOD argues, is that military TSP matches for careerists end earlier, after 20 years in many cases. Also the contributions are a portion of basic pay, which doesn’t equate to the heft of federal civilian salaries. Military TSP needs to grow faster than now planned.
The department also wants government matching of TSP contributions to continue until actual retirement and not end after 26 years as now set.
But the fourth change sought would delay matching of TSP contributions until members enter their fifth year of service, not their third year as the law requires. The delay will affect balances but also is seen as creating an added incentive for members to re-enlist for a second term.
Defense officials estimate that the four changes together would lower savings from the blended plan by $400 million in fiscal 2017 but increase overall savings through 2021 by $1.9 billion. Despite projected savings, the department is confident the blended plan will maintain a quality force.
“We have applied modeling and rigorous analysis to ensure that we understand to the best of our knowledge that, if we implement a blended retirement system, it will sustain the all-volunteer force,” Busch said.
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