Switching From An Existing Retirement Plan
Many employers seeking to join LAGERS are already providing a retirement plan for their employees. Employers with existing retirement plans may have multiple options for converting to LAGERS so long as employee benefits are not duplicated as prohibited by Missouri state statute.
Types of Retirement Plans
Defined Benefit Plan
LAGERS is a defined benefit plan. The benefits from these plans are “defined” because they pay a pre-determined amount for a person’s remaining life after work. Individuals participating in the plan do not direct their own investments; rather, the funds in the plan are pooled together and invested in one portfolio that is managed by professionals. Returns from the investments are used to help pay for the benefits. Defined benefit pensions are the preferred retirement plan in the public sector where 75% of state and local government workers in the U.S. participate in these plans.
Defined Contribution Plan
A defined contribution plan is one where the retirement benefit is not known ahead of time. Rather, the employee and possibly the employer make contributions into an account for the employee. This account is invested in the markets with the individual employees choosing their preferred investment strategy. The employees are responsible for ensuring they save enough and make good choices with their investments. The amount of retirement income provided by these plans depends on the amount of assets the employee is able to accumulate in their account before retirement. These plans are preferred in the private sector where the 401(k) plan has gained popularity over the past three decades. While public sector employers cannot implement 401(K) plans, they may provide a 401(a), 457(b), or possibly a 403(b).
Converting an Existing Retirement Plan to LAGERS
If an employer already has a defined contribution plan in place and is considering adding or switching to LAGERS, there are some things they should know.
Does the existing retirement plan duplicate benefits under LAGERS?
- Missouri state law prohibits an employer from providing LAGERS and another retirement plan that would be duplicative of LAGERS during the same time period. In other words, an employer cannot provide two similar retirement plans during the same time period.
- An employer with an existing defined benefit plan would have limited options to join LAGERS because these benefits would be considered duplicative.
- A defined contribution plan may be considered duplicative depending upon the plan’s characteristics.
- LAGERS staff will review an employer’s retirement plan document to determine the employer’s options for joining.
- An employer may still join LAGERS even if its plan is considered duplicative so long as the coverages of the plans do not overlap.
Options for Employers with Duplicative Plans
- Prior Service. Employers joining LAGERS typically have the option to retroactively cover employees under LAGERS from their hire dates forward. This is called 100% prior service coverage. Employers with existing retirement plans may not have this option if it would create a duplication of benefits.
- Vesting Only Service. If an employer cannot cover any prior service for its employees because of an existing retirement plan, LAGERS would still count the employees’ service prior to the LAGERS joining date toward their vesting in LAGERS.
- Employee Purchase Options. Employees that become vested in LAGERS may have the individual option to purchase or transfer their previous service if their employer could not provide prior service coverage because of an existing retirement plan. Purchasing would add service credits to the employee’s LAGERS’ record, therefore increasing their future retirement benefits. An employee could directly roll funds from an eligible retirement account to LAGERS for the purpose of purchasing service and/or use personal funds.
- New Hires. Employers with an existing retirement plan found to be duplicative may have the option to cover employees hired after a certain date. All current employees would remain covered under the current retirement plan but the plan would be closed to new entrants.
- Prospective Service. Employers with an existing retirement plan found to be duplicative may have the option to cover all employees prospectively. All employee service prior to the date of the change to LAGERS would remain covered under the current retirement plan with benefits in that plan being frozen. Service after the chosen date would be covered under LAGERS.