Hi, my name is Matt Daley.
In this episode of Financial Success Academy, we'll explore the basics of Plan 2 and Plan 3 in the PERS, TERS, and SERS pensions.
As a public employee, you are a member of the Washington State Retirement Systems. Depending on what type of employment you have will determine which specific pension system you participate in. When you start working as a public employee, you'll need to choose between two retirement plans: Plan 2 and Plan 3. You'll have 90 days to make this decision; if you don't choose, you'll automatically be placed in Plan 2.
Both Plan 2 and 3 offer a lifetime pension benefit. The pension amount depends on three factors: The length of your public service, your average final compensation, and the plan you select. It's essential to note that whichever plan you choose is permanent. Even if you leave public service and return later, you'll remain a member of the same plan. Both pans provide the potential for early retirement, starting at age 55, with the full retirement age being 65.
Plan 2 is a defined benefit pension plan where both you and your employer contribute. When you retire, you'll receive a monthly pension payment based on the following formula: 2%, multiplied by years of service, multiplied by your average final compensation. Your average final compensation is the average of your highest consecutive 60 months of earnings, regardless of when they occurred during your service.
Plan 3 consists of two parts: a defined benefit pension plan and a liquid defined contribution investment plan. In Plan 3, your employer contributes to the pension, while you contribute to the investment account. You have the freedom to choose how your investment account is invested. During retirement, you'll receive one benefit from the pension part and another from withdrawals made from your investment account.
The percentage you contribute to the investment account is a fixed selection you make when you start working for your employer. It's important to know that you can't change this election unless you change employers in the future. This decision early in your career could significantly impact your ending balance when you retire. You can choose between six different contribution amounts, ranging from 5% up to 15%. If you fail to make an election, you'll be defaulted to option A.
In Plan 3, The pension formula uses a 1% multiplier, thus resulting in a lower pension payout in retirement. The pension amount is lower in Plan 3 since your employee contributions are directed toward your own investment account instead of the pension. Additionally, your employer may offer a 457(b) or 403(b) plan that you can participate in to enhance your retirement savings.
The majority of public service employees in Washington State are enrolled in Plan 2. The main reasons they cite for choosing the plan are simplicity, lower risk, and less variables that determine the outcome.
Which plan is best for you? The answer is "it depends". It depends on your personal situation and preferences. Our opinion is that in most cases, when DRS adds a number on the back end of a pension, it's rarely a better option. The state generally does not look for ways to give out more money.
As always, please reach out if you have any questions. We're always happy to help you navigate through your unique and personalized financial decisions.