Jeff Pabst, CRC
Employers who partner with LAGERS have the option to require employees to contribute. Employers may elect 0%, 2%, 4%, or 6% as the employee contribution amount. For this blog, we will breakdown the differences between what you may contribute and what your employer contributes to LAGERS.
When employers have member contributions elected, each employee who is working in a covered position at the subdivision must contribute the employee contribution amount. In other words, you can’t opt out of employee contributions. However, the contributions you make to LAGERS, plus interest, are guaranteed to be paid back to you either through a monthly benefit in the future or a refund of contributions. In addition, your contributions you make are after-tax. So, if you have a contribution balance at the time of retirement, a portion of your monthly benefit will be non-taxable.
Your contributions do not fluctuate, unless the employer changes the employee contribution amount. They can change the amount no more frequently than once every two years. Your contributions, by function are helping fund your future retirement benefit. For example, if the cost for your employer’s level of benefits is currently 16% and your employer requires you to contribute 2%, your employer will pay the remaining 14%.
Employer contributions are an actuarial calculation based on assumptions and experience of its personnel group and economic conditions. In less technical terms, employers’ contribution rates are based on things like turnover, retirements, pay increases, investment return and more. For each of those categories, LAGERS has an assumption based on long-term experience to help project future contributions. Annually, LAGERS actuary compares all of its actuarial assumptions to actual experience. This comparison results in increases or decreases of contribution rates.
The risk of contribution increases lies with the employer. However, there are a couple of protections in place to smooth contribution rate increases. The first is state statute which mandates that LAGERS cannot increase a contribution rate by more than 1% in a given valuation cycle. The second is the usage of investment smoothing. This is an actuarial method of realizing investment gains and losses over a long term period (5 years). Mechanically, investment gains or losses are divided over a 5 year period allowing the jagged ups and downs of the markets to be smoothed out for more gradual increases and decreases.
In summary, member contributions are fixed, mandatory, guaranteed and after tax. Employer contributions can fluctuate, are determined by many factors, and there are protections in place to ensure contribution rate stability. Either way, employees and employers making their required contributions ensures LAGERS’ funding stability for you and for the generations to come.