As many employers revisit budgets and reassess compensation packages at the end of the year, questions often arise about whether to upgrade employee benefits. There are several parts of the LAGERS benefit structure that can be changed, each offering potential advantages and trade-offs. Changing your LAGERS benefit elections can influence a member’s retirement benefit amount, how the benefit is funded or when employees can begin drawing their benefit.
Below is a breakdown of the benefit components that can be upgraded, along with the pros and cons that come with changing them.
- Increasing the Amount Members Receive in Retirement
- Pro: Ability to offer better benefit levels
- Con: Higher multipliers may increase employer costs
Employers can choose to change the benefit multiplier or final average salary in an employee’s benefit calculation, which ultimately leads to a higher benefit in retirement.
The calculation used to determine a member’s retirement benefits is Benefit Multiplier × Final Average Salary × Length of Service Credit = retirement benefit.
Benefit Multiplier: LAGERS employers may select a benefit multiplier between 1% and 2.5%. Choosing a higher multiplier increases the size of employee benefits but also raises the cost to the employer.
Final Average Salary: Employers can also change how an employee’s final average salary is calculated, which can either be the highest consecutive 60 or 36 month average out of the last 120 months of LAGERS-covered service. Offering a 36 month final average salary usually results in a slightly higher monthly benefit for an employee in retirement.
2. Changing How the Benefit is Funded (by Reducing Employee Contributions)
Employers can determine the amount employees are required to contribute, ranging from 0%, 2%, 4%, or 6% of salary. If an employer chooses a 0% employee contribution, it means that the employer funds 100% of the retirement benefit.
- Pro: Choosing a lower employee contribution increases employee take home pay
- Con: Increases cost to the employer by reducing benefit cost sharing
If an employer used to require employee contributions but has paid the full cost of benefits for at least two years, they may choose to refund all past contributions that active employees previously paid.
3. Changing the Retirement Eligibility Age
- Pro: More flexible retirement pathways for employees
- Con: Earlier retirement options may increase plan liabilities
Employers may choose between two retirement age options. The first is normal retirement age, which is age 60 for general employees and age 55 for police officers, firefighters, and (if elected) public safety personnel.
The second option is the Rule of 80, which allows employees to retire early and without a benefit reduction once their age plus years of service equals 80. Offering the Rule of 80 can provide significant value to employees, but it may increase the long-term cost to the employer.
Key Takeaways When Upgrading Benefits
When an employer chooses to upgrade benefits, there are a few key takeaways to keep in mind:
- All benefit upgrades are retroactive.
This means that when an employer upgrades benefits, it affects all past and future service of active employees. - Changes to employee contribution amounts are NOT retroactive.
They do not change or refund any contributions employees have already made. - Upgrades do not change benefits for those who have already retired.
- Upgrades do not change previously terminated employees’ benefits unless they return to covered employment with the same employer.
- Generally, upgrades increase the cost to the employer.
For more information, visit molagers.org or contact your employer services specialist.
