There appears to be considerable interest in the recent decrease in contributions (MyFRS.com Contribution Changes) to the Florida Retirement System by HB 5005, and most notably the effect of that decrease to the members of the Investment Plan.  We have been repeatedly asked to help educate our readers on the process, and to that effect, we have attempted to shed some light on the recent changes.  Hopefully this will dispel rumor and false belief, and provide a background and some insight for members to understand what is happening, and what their FRS Options may be.  Because the Pension Plan is a Defined Benefit Plan, the reduced contributions will have no effect on Pension Plan members.  There were no changes to the Pension Plan benefits this year.  On the other hand, the Investment Plan, as a Defined Contribution Plan, will see 30% less money going into their retirement plans as a result of the lowered contribution requirements.  While Florida law may necessitate the changes, it seems counter-intuitive to see the Investment Plan members get punished, as the desired goal of the legislators is to have members move to the Investment Plan.

According to Florida Law, Statute 1121.71, Contributions to the Florida Retirement System are determined on an annual basis by a study of the FRS plan by the designated actuary.  You may follow this link to the actual statute (Florida Statutes regarding annual retirement contributions).  We have quoted the pertinent paragraph here:

1121.71 Uniform rates; process; calculations; levy.—(1) In conducting the system actuarial study required under s. 121.031, the actuary shall follow all requirements specified to determine, by Florida Retirement System employee membership class, the dollar contribution amounts necessary for the next fiscal year for the pension plan. In addition, the actuary shall determine, by Florida Retirement System membership class, based on an estimate for the next fiscal year of the gross compensation of employees participating in the investment plan, the dollar contribution amounts necessary to make the allocations required under ss. 121.72 and 121.73. For each employee membership class and subclass, the actuarial study must establish a uniform rate necessary to fund the benefit obligations under both Florida Retirement System retirement plans by dividing the sum of total dollars required by the estimated gross compensation of members in both plans.

While the changes over the past several years have not been that dramatic, they have indeed changed.  We have prepared a chart below to show the contribution history since 1996.  The information is available in the published FRS Annual Reports.  As you will see below, there has been a wide range of contributions, and current rates are not unprecedented.
Year                       Regular               Spec. Risk
1996/97                16.77%                  26.44%
1997/98                16.77                     26.44
1998/99                15.51                     24.38
1999/00                Unavailable
2000/1                 8.21                        19.35
2001/2                  6.19                        17.33
2002/3                 4.65                        14.90
2003/4                  6.28                        17.42
2004/5                  6.28                        17.42
2005/6                  6.28                        17.42
2006/7                  8.74                        19.81
2007/8                  8.74                        19.81
2008/9                  8.74                        19.81
2009/10                8.74                        19.81
2010/11                9.66                        22.14
2011/12                9.00                        20.00

2012/13                6.30                        14.00

Based on the language of the applicable Florida Statute, it would seem the FRS Pension Plan is very well funded, so much so that dramatic decreases in the contribution rates are now appropriate.  This would be in direct contradiction to the ongoing rhetoric of our Governor, Rick Scott, and various legislators.  Governor Scott seems convinced the plan is underfunded, but the recent action would prove otherwise.

We can only surmise that the new rates are attributable to last year’s legislative action, whereby the Cost of Living Adjustment (COLA) was eliminated going forward, thus significantly reducing the actuarial commitments of FRS .  That change will have a dramatic effect on the amount of money required to pay future Pension Benefits to members.  For example, if the average (from the most recent annual report) benefit to an FRS Pension Plan member is as follows:

The average income for all Plan members is approximately $42,000, and the average pension benefit is $18,066. (A far cry from the implied “rich benefits paid for by the taxpayers” we constantly hear about in the media.  They would have us believe that FRS members retire into the lap of luxury, but the real numbers tell quite a different story).  If the member were to qualify for the 3% COLA, that $18,000 pension benefit would grow to approximately $37,700 at age 85 (Uniform Life Expectancy tables indicate a 60 year old person on average will live to age 85).  That translates into a full 33% more benefit paid out to the member over their retirement.  In the absence of COLA, the savings to FRS is considerable.  Each year going forward (presuming the COLA is eliminated by 2011 legislative action, and not overturned by the Florida Supreme Court), the Florida Retirement System will save more and more money each year, as those with COLA are decreased.  That alone will enable considerable reductions in the annual contributions made by employers and employees.

While we have received literally thousands of calls and comments in regard to the 3% contribution (which would have no effect of funding levels), we have received very few in regard to the loss of future COLA.  We at FRS Options have long argued that the loss of COLA is a much more grievous loss than the 3% contribution members are now required to pay into their retirement.  While neither change is favorable, the COLA loss is much more financially crippling.  For instance:

Assume again the member is making the average $42,000 in income.  The 3% contribution to FRS would be $1,260 per year.  Assume 30 years of employment and the total contribution might be $37,800.  Uncomfortable yes, but the change in your Pension by the loss of Cola is almost $226,000 over your expected lifetime.  We believe it is better to pay $37,800 over a 30 year career, than to lose a quarter of a million dollars in pension payments over 25 years in retirement.

We suspect the damage this year is minimal, as it is an election year, and FRS members did a pretty good job of demonstrating their dissatisfaction with the legislators and the changes made, and it appears the Governor took his hits also.  We fear that next year, with no election come November, could mean more benefit cuts are back on the table, especially the ruling negating the 3% employee contribution and the loss of future COLA are rescinded.  It will be especially interesting if the Florida Supreme Court orders a repayment of the funds with interest, as the employers will most likely have some serious scrambling to do to come up with those funds.   We suspect the legislators will make every attempt to make other cuts if they are unsuccessful in the courts.  It may also wreak havoc on the funding levels of FRS, in no small part due to the reduced contributions going in to the plan after July 1.  All told, it could be a perfect storm of calamity if the 3% employee contributions must be refunded, and the COLA is restored, in conjunction with radically reduced contributions to the plan.  While the plan may be well funded currently, it is foreseeable that it will be grossly underfunded next year – and we hold the short sighted efforts of the legislature to blame.  Stay tuned, we shall see how it all unfolds.

The interpretations of the post are made by FRS Options.  All information is deemed to be reliable, but is not approved, nor endorsed by the Florida Retirement System.  You are urged to verify all facts posted.  If any of our information seems in error, please contact us and we will confirm or amend promptly.
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  • Gcotell1

    How did you calculate the cola loss of $226,000.  It seems a bit high.

  • http://www.floridaretirementsystem.info FRS Options

    I simply multiplied the annual pensionof $18,000 by 1.03 for the 25 years (on an excel spread sheet. The original $18,000 grows $18,540, then 19,096, then … to $38,000 after 25 years. $18,000 with no COLA for 25 years equals $450,000. If we increase it by 3% per year, the total is $693,955. The difference is $243,955.

  • Kyle0226

    If the 3% deduction holds up in court as unconstitutional would this apply to reducing the investment plan contributions?  It seems two things need to happen:

    1. The actuary study should be challenged.  It seems impossible if the FRS plan is in dire straights they are able to reduce funding by almost a third to maintain levels.

    2. A third election option must submerge.  If a second time election is based on certain numbers and you change the numbers, YOU SHOULD BE ABLE TO CHOOSE AGAIN!  

    Who is heading the efforts for the lawsuit regarding investment plan changes?

  • http://www.floridaretirementsystem.info FRS Options

    It is probably important to realize that ALL funding decisions are made based on the funding of the Pension, and NOT the Investment Plan. Any decision to go into the Investment Plan should be made with many other considerations other than the contribution levels, as the annual re-setting of contributions has always been in place. To our knowledge, the longest any contribution level has been constant has been 3 years.

    If you survey most retirement Plans, the fact that FRS offers options is a luxury. Many public employees at the local level have only the Pension Plan option.

    FRS is by no means in dire straits. It has some minor underfunding issues that resulted from the financial meltdown of 2008, but the market returns, as well as the legislative actions of 2011 have put FRS back in excellent stead. It is, and has been one of the most sound Pension Plans in the country.

    To the best of our knowledge there is no lawsuit regarding investment plan changes, as the investment plan changes are a reflection of the changes to the Pension Plan, which is what determines the contribution levels. By any standard, FRS is a very generous Investment Plan. Even at the reduced levels, it is a 100% match to 100% of employee contributions into the plan, which is unheard of in 401k type plans.

    We do not know of any precedent or provision for challenging an acturarial study (especially that reduces public spending).

  • Brenda Porter

    I’m not clear on this. My husband and I are retired. Does this mean we will not be getting the annual COLA on our pensions?

  • http://www.floridaretirementsystem.info FRS Options

    If your are retired, nothing changes. You will still get your COLA as in the past.

  • Nelson Duenas

    Presently i am in the DROP program and my retirement date (end of DROP) is July 31, 2013. I will retire with 35 years of service (30 years plus the five years of DROP). I am concern with all these changes and proposed changes. Therefore, Could my calculated retirement monthly income (option-3) and the one time DROP amount be affected? or do I get grandfather-in?
    Please let me know.

    Thanks

    Nelson

  • Mike

     You said and I quote “Even at the reduced levels, it is a 100% match to 100% of employee
    contributions into the plan, which is unheard of in 401k type plans”.
    That is not true at all, many 401k plans are 100% match plans and the FRS Investment plan has essentially become a 100% match with a max of 3%. My wife teaches in a charter school which gets a lot less funding then public schools and they have a 100% match with a max of 5% which is better then what the FRS Investment plan has become. They can do that though because they do not have a Pension Plan draining all the funds up.

    I have been in the Investment Plan for close to 6 years and to get in the Pension Plan it would cost me close to $10,000 out of pocket to switch because I would already have that much more in the Pension Plan. It makes no sense that the Investment Plan is taking this hit when the Pension Plan was already clearly the better retirement option before these cuts.

  • Carol

    No one seems to be able to answer this question – or I may not be phrasing it correctly.  I am retiring under frs at the end of June this year.  I am trying to set up my budget.  I know they take federal income tax.  Do they take social security tax out?   If they do not, do  I need to pay social security on my own (the full 12%)?

  • http://www.floridaretirementsystem.info FRS Options

    We believe you are safe. As of yet, there have been no changes to those in retirement plans, and the courts have been pretty adamant that there will be no changes to those already collecting benefits. Since you are in the DROP, you are considered retired, and there are no changes that have been made that will affect you.

  • http://www.floridaretirementsystem.info FRS Options

    We don’t believe we are incorrect. It appears you are saying they match to a maximum of 5%, which is usually the cap. The match for FRS has no cap, it is 3% for every penny you make. We have never seen a 401k type plan that matches for 100% of pay. If there is, then we are wrong.

  • http://www.floridaretirementsystem.info FRS Options

    Pension income is subject to Federal Income tax in the year your recieve it. The payments will not have payroll taxes includingi social security taken out. Once you are collecting your pension, you are no longer required to pay into social security.

  • Juan Martinez2

    Juan F.M.

    I have been in the FRS System for 20 years.

    I’m currently 55 years old, were do I go to get better benefits?

    When I started with Orange County I was young and I took a big cut in pay inoder to take  advantage of the benefits, but now litter by litter, before my retirement Iam loosing benefits here and there , due to the loss of the cost of living, Marige increse, and a few other cuts in benefits.

    So now the legislature is playing with what I have worked for, for so many years in Orange County.

    ???Weare geting close to a communist society, like China and Cuba ?

    I’m very sad because now I’m old and can not afford to Quit.

    I’m so sorry that hapen now and no when I was young!!!

  • http://www.floridaretirementsystem.info FRS Options

    We’re not quite sure where to go with this one, but we’re guessing your job pay and benefits are not that bad. You have a job, you have benefits, and you have a retirement, which is more than better than 9% of the US work force can say. Close to Cuba and China? We’re guessing you are better off than 99% of those in either country. Look around in the private sector, and let us know if you find a better benefit package.

  • Kyle0226

    Shouldn’t there be a negative correlation between funding for the pension plan vs. investment plan contributions from the state?  As the pension plan becomes underfunded (currently at 87%, which is higher than the US average) shouldn’t investment plan contribtuions go up, not down.

    Is there any way we can see funding levels as a percentage, up against investment plan contributions (list above?) 

  • http://www.floridaretirementsystem.info FRS Options

    The contributions to the Investment Fund are the same as those into the Pension Plan. The funding of the Pension Plan by the actuaries determines what the contributions to the Pension Plan are, and those are the same as the Investment Plan. There is no separate consideration for the Investment Plan.

  • Scienceteacher

    Am I correct in reading that I will be penalized for being in the Investment plan? Instead of a 6% contribution, it is going to be reduced to 3%? If so, how can this be legal? I was told the two plans were equally funded when I was hired 8 years ago.

  • http://www.floridaretirementsystem.info FRS Options

    I think you are forgetting the employee contribution. The contributions for the Investment Plan are the same as the Pension Plan.

  • 1cass

    In reading the fine print on my Investment Plan notes  I see that the account manager is paid on the daily  balance of fund accounts.  Presumably that means if your fund receives dividends, then the fee is based on both asset value and dividends,  I.E. gross value.  I have other assets in brokerage accounts and never have paid fees based on total asset value.  Who negotiated this stuff?

  • http://www.floridaretirementsystem.info FRS Options

    The management fees for most every money manager are paid on assets at the end of business day, each day. That is standard procedure. Read just about any prospectus for private, public, or mutual fund manager’s, it is the same.
    Sorry, there is no conspiracy in the daily fee arrangement.

  • Eric Beach

    What other considerations would a career minded employee consider besides the contribution level?  

    Investment plan members received the shaft.  I opted into the the defined contribution plan and opted out of the defined benefit plan.  I was happy trade the defined benefit for the defined benefit.  The legislative changes have drastically reduced my future value benefit, and have not affected the future value defined benefit of my peers.  I was “sold” a defined employer contribution benefit requiring no employee contribution.  The state was happy to sell it to me, in fact they wanted to sell it to all the employees to release them from future liability that a pension plan presents.  

    What I now have a 3% matching 401K plan that I am legislatively required to contribute.  NOT what I opted into.  The decision was Defined Contribution NOW versus Defined Benefit LATER.  How the legislature can cut the Defined Contribution NOW, and leave the Defined Benefit LATER untouched and consider that equitable is ludicrous.

  • http://www.floridaretirementsystem.info FRS Options

    If you opt for the Investment Plan, obviously the contribution is paramount. Unfortunately, the contributions are dictated entirely by the actuarial requirements of the Pension Plan. The reduction was determined because of cuts to the Pension Plan, such as the elimination of future COLA, longer vesting periods, higher retirement ages and other factors that allow the contribution level to be reduced. The plan you signed up for did not change, the contribution is still determined annually by the requirements of the Pension Plan. It is now, and has always been what drives the contributions. It most likely hurts the Investment Plan more, which is ironic, as the Governor and Legislature would like to see all employees in the IP, and do away with the Pension Plan.

  • cct

    I am a new employee and trying to make a decision between the Pension Plan and the Investment Plan. What is the point in supplying all these documents explaining the difference between the two choices if everything is just going to change a year later anyway? I’m glad I came across this article because I was going to go with the Investment Plan with the thinking that it would be less likely to be changed by the legislature, but that is obviously incorrect. Why should people who chose the Investment Plan have to take the risk of their investment losing value as well as the risk of having lowered contributions because the Pension Fund doesn’t do well?

  • http://www.floridaretirementsystem.info FRS Options

    The Investment Plan contributions (at least for now) are based wholly on the contributions required fore the Pension Plan. If the pension plan performs poorly, it would most likely lead to larger employer contributions, and conversely, if the plan does well, the contributions could be lowered. Last year the legislature lowered them for what we would deem political reasons, and will probably have to raise the contributions going forward to make it up. There are many reasons the Investment Plan can be appealing, the employer contribution is but one.

  • cct

    I don’t understand this. Maybe I am misreading it but it looks like the total contributions for the Regular Class Pension Plan is 9.95% and for the Regular Class Investment Plan is 6.30%.

  • http://www.floridaretirementsystem.info FRS Options

    We are not sure what you are reading, but the contributions for the Pension Plan and the Investment Plan are the same. Here is a link with the current and future rates: http://www.myfrs.com/imageserver/pdf/2013_Legislation.pdf
    You will note there is no differentiation between the two plans, only the class of employee.

  • cct

    I am looking at the last column in the first row of Table 2 and Table 5.

  • http://www.floridaretirementsystem.info FRS Options

    The last column of Table 2 is not what is credited to the employee’s FRS account, it is a total of contributions made on behalf of the employee to all benefit plans, from the unfunded liability obligation to HIS and the education fund. The last column of Table 5 shows what actually goes into FRS on behalf of the employee. You will note there is not difference between Pension Plan participants and Investment Plan participants on either chart. If you are regular risk, 6.3% goes into your FRS account.

  • Eric Beacj

    Where can I find copies of all the FRS Literature that was being distributed at the time of my election from the defined benefit to the defined contribution?

  • Eric Beacj

    FRS Options I challenge your response, I ask this in the most respectful manner. Could you name ONE reason that a career minded employee would opt out of a state guaranteed defined benefit 20-30 years from now with no future value risk (to the employee), to assume all future value risk AND an unknown annual contribution rate?

    It was and is the State’s intention (and marketed as such), to exchange the risk of unknown future liability for a known current liability. This make complete logical and financial sense, and was the logical and financial premise of the employees that opted into the investment plan.

    However, employees that opted in the investment plan were mislead into the premise that they were assuming only the market risk (future value) in exchange for a defined contribution. They did not know that they were also assuming the contribution rate risk which is determined on the whims of the legislature. They currently assume both risks. Pension plan members currently only assume one risk.

    To add insult to injury the legislature THEN REQUIRES the Defined Contribution (Investment Plan) members to contribute 3% to their Defined Contribution (Investment Plan) to mitigate the future liability of the Defined Benefit (Pension Plan).

    Quite simply the investment plan was fatally flawed from the beginning with its legislative ties to the pension funding rate. It should have been two separate plans independent of each other. They have co-mingled and combined pension plan members varied future liabilities and have underfunded the plan to deliver those defined benefits all at the expense of the plan that they would like all employees to go to. See any irony in that?

  • http://www.floridaretirementsystem.info FRS Options

    We could name several. In the event of retiree death, the Investment Plan balance will go to whomever you would like it to go to. The Pension Plan balance reverts back to the state, unless you take a significant cut in your pension to provide a benefit to your Spouse. A spouse is the only option. At the death of the spouse, any remaining balance goes to the state and not your beneficiaries. The Investment Plan is YOUR money, the Pension Plan only improves your wealth by what remains unspent of payments received. The Investment Plan can be taken with you in the event you leave FRS employment, the Pension ceases at the date you leave. There are a lot of reasons one might choose the Investment Plan. That said, the Pension Plan is a great option, but is only one of several FRS Options.

  • http://www.floridaretirementsystem.info FRS Options

    We can’t really isolate the information from the time of your election, but the following links will provide you with a lot of the literature that FRS makes available:
    http://www.dms.myflorida.com/human_resource_support/retirement/publications

    http://www.myfrs.com/portal/server.pt/community/myfrs/257

  • cct

    If you are a member of the Investment Plan does any portion of your employer contribution go towards funding the unfunded liability obligation of the Pension Plan?

  • http://www.floridaretirementsystem.info FRS Options

    No. The employer contribution to your plan does not go toward the unfunded liability.

  • cct

    Is there a way to see the breakdown of where the employer contributions go for the Investment Plan, similar to Table 4 for the Optional Programs? For some reason it looks like the Optional Programs contribute 2.19% for the Unfunded Actuarial Liability of the Pension Fund. If that is the case it seems like that 2.19% should just be deposited into their account instead of helping to prop up the pension fund they aren’t even in.

  • http://www.floridaretirementsystem.info FRS Options

    We believe you will find that the contributions into the Employee account do not include the contributions made for the unfunded liability. The are not contributions to the member plan, but a contribution to the Pension plan to make up un=funded liability. I suspect there would be legal issues in taking money intended to, and mandated to shore up the pension, and put it into a members Investment Plan.

  • cct

    Wow, that is unbelievable.

  • http://www.floridaretirementsystem.info FRS Options

    What is truly unbelievable is the legislature did not mandate appropriate funding all along. The cut it in good years, and then last year reduced them significantly, only to come back this year and whine about the “underfunded” status and then up the rates. Only a politician can make sense of that!

  • Mike

    You are incorrect. The match for her Charter School has no cap and it is 5% for every penny she makes.Her school does not have a pension option so it is strictly 401k’s. You have not looked around too hard to find 401k’s that match for 100% of the pay because they do exist outside of OCPS. So, like I said before my wife’s Charter School contributes more towards their teachers 401k then OCPS does for teachers in the Investment option and her school gets less funding. I’m sure it has nothing to do with the Charter School not having to fund bloated pensions that public schools have to fund (sarcasm).

  • http://www.floridaretirementsystem.info FRS Options

    Mike, We are referring to the FRS employee contributions for the Pension Plan or the Investment Plan. The employee contributes 3%, and the employer contributes 3%, for every dollar earned. It is not a 401k plan, so we are not familiar with the Charter School plan you refer to. Is it a part of FRS?

  • Bryan Buchanan

    My employer paid in (along with my 15% contribution) a total of $12,700. from July 2012 to July 2013 and the FRS only put $8,700. into my investments as per your website information… where is the other $4,000. going? Per your accountants that are available from the website the monies are used to cover “all of the other benefits we receive”. I believe this is a simple way of saying that the FRS takes in the money and spends it where it wants, no longer putting 100% into my investment account(s). Please advise how we can remedy this huge loss of retirement money. Can HB 5005 be repealed? Can Tallahassee change the “11%” of our gross (with our 3%) back to the 17% it originally was? A loss of $4000. per year not going into my account will be devastating to my retirement plans, causing me to work longer and save more in my personal ICMA. How can this wrong be corrected? Please advise any current or upcoming plans or class actions that might help us out… those 114,000 of us not in the regular plan…

  • http://www.floridaretirementsystem.info FRS Options

    Hello Bryan,

    Something about your numbers doesn’t seem correct. Your contribution should only be 3%, and depending on whether you are regular risk or special, the employer contribution should be either 6.95% (regular) or 19.06%(special), and both yours and theirs, less the 1.2% for the HIS, and a .3% fee would go directly to your Investment Account. We can’t evaluate the dollar figures, as we wouldn’t know what your income was, but something is not appropriate with the numbers incidated. We have no accountants, but I suspect part of your 15% deduction from your check is for taxes (FICA/SS), which does not go into your account. I would suggest you go over your pay stubs with your employers and determine the amounts. The Legislation can change the amounts (including the employee contribution) to whatever they deem to be appropriate for the proper funding of the plan. We believe you will find all monies withheld for your retirement are going into your account.

  • Bryan Buchanan

    I can assure you my numbers are accurate…7 years of college and all. The numbers are after all from your own website. It clearly shows that the deposits made into my FRS Investment Plan account totalled a mere $8723. for 2013, while both my employer payments to the FRS along with my 15% (of the total paid into the FRS) which is 3% of my annual gross…was $12,701. You people keep calling our portion a miniscule 3%… when it is in fact a 15% portion of what goes to you at the FRS. Either way taking out your 1.2% for HIS and .3% other fee, whatever they are, should not constitute a $4000 loss of principle going into my accounts! That is simply theft by Legislative action, and multiplying it by the 114,000 of us in the Investment Plan, brings it to close to half a Billion taken from us. Please explain that away…

  • http://www.floridaretirementsystem.info FRS Options

    If that is the case, you really need to call the Florida Retirement System and find out what is going on. We at FRSOptions.info are not affiliated with the FRS. Any numbers reported on our website come directly from the information the state provides, and while we believe it to be accurate, it can only be as accurate as what we garner from the information the FRS makes available. The information is available in the FRS Annual Report, as well as the information on the MyFRS,com website. If your information doesn’t conform, you really need to investigate it and see where the discrepancies are.