Tag Archives: defined benefit plans

What is a Defined Benefit Plan?

As a NYSLRS member, you are enrolled in a defined benefit plan, also known as a traditional pension plan.

How a Defined Benefit Plan Works

Defined benefit pension plans provide a specified payment amount at retirement. If you are vested and retire from NYSLRS, you will receive a monthly pension payment for the rest of your life. Your pension will be calculated using a preset formula based on your earnings and years of service. Your individual contributions to NYSLRS will not affect the pension you receive when you retire.

Defined benefit plans are supported by contributions from both members and employers. With defined benefit plans, retirement assets are pooled and the investment risk is shared. These plans are usually administered by professional managers, whose long-term investment strategies help to reduce the impact of market turmoil. NYSLRS employs an experienced group of investment managers.

The biggest contributor to your pension plan is the New York State Common Retirement Fund. Over the past 20 years, the Fund’s investment returns have covered 75 percent of the cost of pensions.

understand your defined benefit plan

Defined Contribution Plans — And Their Risks

Defined benefit plans are often confused with 401(k)-style retirement savings plans, which are known as defined contribution plans.

With a defined contribution plan, the employee, the employer or both make contributions to an individual retirement account for the employee, and the money in the account is invested. In most cases, the employee decides how and where the money is invested (or the plan may offer pre-packaged investment options). At retirement, the employee will be able to draw from the accumulated value of contributions and investment returns, minus any fees.

The amount of money the employee has at retirement depends on the investment returns of the individual account. So, market downturns, especially near retirement, can negatively affect the value of the benefit. Employees depending on defined contribution plans run the risk of outliving their savings.

NYSLRS’ Defined Benefit Plans

NYSLRS administers more than 300 retirement plan combinations, but all of them are defined benefit plans and share certain features. NYSLRS plans:

  • Provide a guaranteed benefit for life;
  • Offer a pension based on final average earnings and years of service;
  • Provide a right to pension benefits (vesting) with five years of service credit;
  • Build a cost-of-living adjustment (COLA) into pensions to help offset the effect of inflation; and
  • Include disability retirement and death benefits.

We strongly encourage you to review your retirement plan publication for a complete description of your benefits. To find your retirement plan publication, visit our Find Your NYSLRS Retirement Plan Publication page and follow the steps listed.

Advantages of Defined Benefit Plans

Defined benefit plans provide important advantages for state and local government employers. For one, offering these plans makes it easier to recruit and retain qualified employees, particularly police officers, fire fighters and teachers. Employers can also reduce the risk of employee turnover, which could help cut training costs and improve productivity.

Defined benefit plans also help support state and local economies, because they provide a steady, reliable stream of retirement income for many retirees across New York and the nation.

Read more about the advantages of defined benefit plans.

Defined Benefit Pension Plans Boost National Economy

Defined benefit pension plans, including NYSLRS, provide retirement security for millions of Americans. Here in New York, NYSLRS pays out more than $10 billion in benefits each year to nearly 400,000 New York State residents. Much of that money is spent at home, contributing to local economies and supporting jobs.

What’s happening here is mirrored across the country. According to a study released by the National Institute on Retirement Security (NIRS) in 2021, defined benefit pension plans paid $578.7 billion to 23.8 million retired Americans, and those payments had a significant impact on the nation’s economy.

What Is a Defined Benefit Pension Plan?

A defined benefit pension plan provides a pension that is based on a preset formula that takes into account salary and years of service. Unlike a 401(k)-style retirement plan (also known as defined contribution plan), it is not based on how much you or your employer contribute to your retirement account. A defined benefit plan provides a fixed monthly payment at retirement and is usually a lifetime benefit.

With a defined contribution plan, the amount of money the employee has accumulated at retirement depends on the investment returns of their individual account. A market downturn, especially near retirement, can affect the value of their benefit. With a defined benefit plan, market risk is shared, so a downturn doesn’t affect the benefit.

Most importantly, defined benefit pension recipients don’t have to worry about their money running out during their retirement years.

economic impact of defined benefit pension plans

Who Gets Defined Benefits?

Defined benefit pension plans were once much more common in the United States. Today, defined benefit plans are more commonly offered by public employers, though about 16 percent of full-time private sector employees had access to a define benefit plan in 2018.

Who received these benefits? According to the NIRS study:

  • $308.7 billion was paid to 11 million state and local government retirees and beneficiaries;
  • $105.9 billion was paid to 2.6 million federal retirees and beneficiaries; and
  • $164.1 billion was paid to 10.1 million private sector retirees and beneficiaries.

Employers Benefit from Defined Benefit Plans

Not surprisingly, the financial security provided by defined benefit plans has proved popular among workers. In 2019, the NIRS surveyed 1,100 public employees about their benefits. Most said retirement benefits are good tools for recruiting and retaining workers, and 86 percent said their retirement benefits are a major reason they stick with their jobs.

National Economic Benefits of Defined Benefit Plans

The $578.7 billion in pension payments generated spending that supported 6.9 million American jobs with paychecks totaling $394.2 billion, the study estimated. But the economic benefit didn’t stop there. This is because of what economists call the multiplier effect, the measure of the true impact of each dollar spent as it works its way through the economy.  

The study found that each pension dollar paid had a $2.19 multiplier effect, which resulted in nearly $1.3 trillion in economic output. Real estate, food service, healthcare, and wholesale and retail trade were the sectors most impacted.

The study also noted that defined benefit pension payments have a stabilizing effect on local economies. Because they have a steady source of income, retirees with a defined benefit plan are less likely than retirees with defined contributions to curtail spending during economic downturns.

“These plans are a cost effective way to provide secure lifetime income for retired Americans and their beneficiaries after a lifetime of work. Moreover,” the study concluded, “DB pension plans generate economic benefits that reach well beyond those who earned benefits during their working years.”

Top Five Pre-Retirement Goals for NYSLRS Members in 2018

January is a great time to set goals for the coming year. And setting pre-retirement goals is crucial in planning for a successful retirement. Here are five goals to consider for 2018:

Plan ahead for retirement

1. Choose a sensible savings plan that works for you.There are several ways to save for retirement, including starting a deferred compensation plan like the New York State Deferred Compensation Plan. An important part of developing a savings plan is to start early. The sooner you start saving, the more time your money has to grow. Check out our Weekly Investment Plan chart to see how a weekly investment can grow by age 65.

2. Track your expenses and income. Tracking your current expenses for a month or two will give you a better idea of how much you’re likely to spend in retirement and how much you’ll need to supplement your pension. Use the expense and income worksheets on our website to create a retirement budget. Be sure to include periodic expenses, such as car insurance and property taxes.

3. Request a pension estimate. If you’re within 18 months of your anticipated retirement date, it’s a good idea to request an estimate of what your retirement benefit will be. You can do this by sending us an email using our secure contact form or by calling 1-866-805-0990 (518-474-7736 in the Albany, NY area). If you are not certain that you’ve received credit for all your public service in New York State, you can submit a Request for Estimate form (RS6030) and be sure to provide detailed information about your public employment in section eight of the form. If your planned retirement date is farther away, you may want to use our online Benefit Calculator. This estimates your pension based on information you provide, so have your Member Annual Statement handy before you start, or sign in to your Retirement Online account to check your current service credit.

4. Pay off any NYSLRS loans. An outstanding loan balance at retirement will permanently reduce your NYSLRS retirement benefit. You cannot make loan payments after you retire, and the pension reduction does not go away after we recover the balance of the loan. Visit the Loans page on our website for information about making additional payments or increasing your loan payment amount.

5. Consider seeking the advice of a financial planner. Financial planners don’t manage your money, but can help you assess your present financial condition and develop a practical plan to meet your specific goals and needs. Also consider doing your own research by seeking Do-It-Yourself financial planning guides on the web.

If you ever have any retirement-related questions, please contact us.

NYSLRS’ Partial Lump Sum Payments

When you retire, you’ll choose a payment option for your monthly lifetime benefit. Eligible NYSLRS members may also choose to receive a partial lump sum payment. The payment, which you’ll receive when we finish calculating your pension benefit, is a percentage of the actuarial value of your retirement benefit at the time you retire. By accepting this one-time lump sum payment, your lifetime monthly benefit will be permanently reduced.

Who is Eligible for the Partial Lump Sum Payment?

If you’re a Police and Fire Retirement System (PFRS) member covered by a special 20- or 25-year plan, you may be eligible to choose this payment. Certain Employees’ Retirement System (ERS) members (sheriffs, undersheriffs, deputy sheriffs, and county correction officers) are eligible if their employer offers this benefit. (Read the other eligibility requirements for PFRS members and ERS members.)

Partial Lump Sum PaymentsHow the Partial Lump Sum Payment Works

The percentage amounts you can choose from depend on how long you’ve been eligible to retire. You can choose a lump sum payment that equals 5, 10, 15, 20 or 25 percent of the value of your retirement benefit.

The payment can be made directly to you, or you can also have it paid in a direct rollover to an Individual Retirement Annuity or other plan that accepts rollovers. Before you decide, you may want to speak with a tax advisor to see if the partial lump sum payment is right for you. Certain partial lump sum distributions could be subject to federal income tax.

How Do I Choose the Partial Lump Sum?

If you’re eligible for the partial lump sum, we’ll send you a special option election form when you file for retirement. You can use this form to choose both the partial lump sum and the payment option you want for your continuing lifetime monthly benefit.

Please read Partial Lump Sum (PLS) Payment at Retirement – For Eligible Retirement System Members for more information.

NYSLRS – One Tier at a Time: ERS Tier 1

When you joined the New York State and Local Retirement System (NYSLRS), you were assigned to a tier based on the date of your membership. There are six tiers in the Employees’ Retirement System (ERS) and five in the Police and Fire Retirement System (PFRS) — so there are many different ways to determine benefits for our members. Our series, NYSLRS – One Tier at a Time, walks through each tier and gives you a quick look at the benefits members are eligible for before and at retirement.

One of our smallest tiers is ERS Tier 1, which represents 0.7 percent of NYSLRS’ total membership. Overall, there are 4,520 ERS Tier 1 members. Today’s post looks at the major Tier 1 retirement plan in ERS – the New Career Plan (Section 75-h or 75-i).
ERS-Tier-1-Benefits_001
If you’re an ERS Tier 1 member in an alternate plan, you can find your retirement plan publication below for more detailed information about your benefits:

Be on the lookout for more NYSLRS – One Tier at a Time posts. Want to learn more about the different NYSLRS retirement tiers? Check out some earlier posts in the series:

Contributing Towards Your Retirement

What are Member Contributions?

Most New York State and Local Retirement System (NYSLRS) members contribute a percentage of their gross earnings to the New York State Common Retirement Fund (Fund). These member contributions, in addition to employer contributions and investment earnings, help make sure the Fund stays well-funded to support the retirement benefits earned by members and retirees.

Types of Member Contributions

Membership-Contributions_TimelineYour tier and retirement plan determine if you must contribute and what percentage of your earnings you contribute. At NYSLRS, there are two types of member contributions: required and voluntary. If you belong to a retirement plan with required contributions, you must make member contributions for the length of time stated in your retirement plan. If you make voluntary contributions, you belong to a retirement plan where you don’t have to make contributions, but you can volunteer to make contributions.

To help you understand how much you are supposed to be contributing, here is some useful information regarding contributions, broken down by what system you are in:

Employees Retirement System (ERS)

  • Most ERS Tier 1 and 2 members are not required to contribute, but may contribute voluntarily. ERS Tier 1 and 2 members receive an annuity based on their voluntary contribution balance in addition to their pension at retirement.
  • All ERS Tier 3 and 4 members are required to contribute 3 percent of their gross earnings until they’ve been NYSLRS members for ten years, or have ten years of service credit (whichever comes first).
  • ERS Tier 5 members are required to contribute 3 percent of their gross earnings for their entire career.
  • ERS Tier 6 members are required to contribute for their entire career a specific percentage of their earnings based on their salary.

ERS Exceptions

  • Though most ERS Tier 5 and Tier 6 members are required to contribute for all their years of service, the contributions of State Correction Officers in these tiers are limited to 30 years of service.
  • ERS Tier 5 Uniformed Court Officers and Peace Officers employed by the Unified Court System must contribute 4 percent of their salary for all their years of public service.

Police and Fire Retirement System (PFRS)

  • Most PFRS Tier 1 and Tier 2 members, as well as PFRS Tier 3 (Article 11) members, are not required to contribute, but may contribute voluntarily.
  • PFRS Tier 3 (Article 14) members must contribute 3 percent of their gross reportable earnings for 25 years or until retirement (whichever comes first).
  • PFRS Tier 6 members are required to contribute a specific percentage of their earnings based on their salary for their entire career.

PFRS Exceptions

  • Though most PFRS Tier 5 members must contribute 3 percent of their gross reportable earnings for all their years of public service, PFRS Tier 5 members enrolled in a retirement plan limiting the amount of creditable service they may accrue will not be required to contribute once they reach the maximum amount of service allowed by their plan.
  • If a union-negotiated collective bargaining agreement in effect on January 9, 2010 required an employer to offer a 20- or 25-year plan, any new employees who join while that agreement is in place will not have to contribute.