Episode 14 – Choosing between Plans 2 and 3
Episode transcript:
[musical intro]
Jenny
Welcome back to Fund Your Future with DRS. And today we’re exploring a great topic that we get questions all the time about, which is: when you’re starting as a new state employee, how do you choose between Plan 2 and Plan 3?
Seth
I’m so excited that we’re having this conversation because it is a super common question. I’m not sure how many brand new employees are going to just sit down and listen to our podcast, but we’ll see how that happens. And also super excited because this is the first time we’ve ever had somebody else in the studio with us to talk about this.
And so we’ve invited Kim from our contact center, who has these conversations all the time with customers.
Jenny
Every day.
Kimm
Every day.
Seth
Every day. And so folks who are in the public employee plan or the school employee plan or the teachers plan have a choice between Plan 2 and Plan 3. And so we’re just going to talk generally try to answer some of those questions.
Jenny
Yeah. So, Kim, if I’m a new employee to the state and I’m trying to choose between Plan 2 and 3 and there are varying differences – How do I make a decision? What’s the difference?
Kimm
So we can’t make the decision for you at DRS. But what I can do is I can tell you the difference between the two plans help you kind of make a decision. Choosing between Plan 2 and 3 is definitely an individual choice. Depending on what your career goals are, how long you plan to work for the state, Do you want to work for five years?
Do you want to work for ten years? What is your age? Are you under the age of 44? Are you over the age of 44? Those are some of the things that you want to consider because those all play into vesting when you become vested when he can draw your monthly lifetime benefit. So if you are…
Jenny
Do you want to kind of just touch on vesting a little bit and what that means.
Kimm
Absolutely. Absolutely. So vesting is you would need to have a minimum of five years for Plan 2 to be eligible, eligible to draw a monthly lifetime benefit when you become age eligible.
Jenny
Yeah. And so that’s five years of having worked for the state.
Kimm
Absolutely. Within one of the plans you would need to be in an retirement eligible position and work and get at least 60 service credits. You get one service credit for every month. You work 90 hours or more. When you hit 60 service credits, you have five years. You’re now vested in Plan 2. Plan 3 is a little different.
If you are under the age of 44, you may need to work for ten years. You may need 120 service credits in order to become vested for a lifetime monthly benefit in Plan 3. So if a member is under the age of 44, you will be required to get ten years of service credits in Plan 3 unless you work at least 12 months after the age of 44.
What that means is you have to work at least 12 months between age 44 and 45, and then you would only need a total of five years service credit or more to be vested for that same monthly lifetime benefit.
Seth
So if you’re over the age of 44, then the vesting is the same. You’ll vest in five years, whether you’re in Plan 2 or whether you’re in Plan 3.
Kimm
Correct. Correct.
Seth
So what are some of the other differences between Plan 2 and Plan 3? When you’re talking to a customer and kind of explaining side by side the two plans, what other than vesting would you talk to somebody about?
Kimm
So with Plan 2, you’re going to have an “either or choice”, I call it. When you separate from employment, if you are vested, you have the option to either take your contributions and the interest, your contributions have accrued and forfeit your pension, or you leave those contributions and interest there. They get swept into the pension fund. And then when you are age eligible, you can draw a monthly lifetime benefit.
That’s for Plan 2. Plan 3 you have what we call two pots of money. You will vest so you can draw your lifetime monthly benefit. Remember, you either work the five years or the ten years and Plan 3. And once you’re age eligible, you will get your monthly lifetime benefit because that benefit is funded in part by the employer contributions.
The second part of money are the contributions that you’ve paid into the investment program. And when you separate from employment, those monies are yours and they will not have any impact on your monthly lifetime benefit.
Seth
So , you used a word “age eligible.” And so for our Plans 2 and Plan 3 in general, the retirement age is 65. So whether you stop work at 50 or whether you stop work at 65, once you reach age 65, you’re going to be eligible for that monthly pension benefit as a Plan 2 member, or as a Plan 3 member.
Kimm
Correct. Correct. Age 65 is full retirement age.
Seth
What other what other differences or things would people want to think about? I certainly use the two bucket story for Plan 3 as a way to think about that. What other things do you share with people or make sure that they’re aware of when they’re making that choice?
Kimm
The benefit calculation at time of drawing your retirement. For Plan 2, we use a 2% calculation, 2% times your average income, your monthly average income, times your service credit years. That’s how we determine your monthly benefit. With Plan 3, it’s a 1% calculation. It is 1% times your service credit years times your average earnings. In Plan 3, you have that second pot of money that you can draw from to sort of bridge the gap for that extra percent that you’re not getting in Plan 2.
So that’s where I talk to our members and let them know, depending on how long you plan to work, what your financial goals are when you retire, would you do better with having that second pot of money, your investment money that you can work from at the time of retirement and you can afford to take a 1% benefit calculation or do you just need that 2% benefit calculation to carry you through?
Seth
Yeah. So there’s a lot more, some would say like a lot more certainty with Plan 2 and what you’re going to get at time of retirement because that second bucket in Plan 3 is your investment account. And so much of that is determined by, one, how much you choose to put in to the investment account and then what investments you choose and then how the market does during that time.
There’s just a lot more kind of unknowns or maybe some of those things are in your control and some of those things are outside of your control.
Jenny
Yeah, that’s the kind of thing I kind of wanted to touch on is I would think that maybe some people that are not familiar with investing or maybe they hear with Plan 3 that you have to choose your investments, and that’s kind of scary to them. Kim, What would you say to that?
Kimm
So if you’re not that comfortable with investment, you’re not really you don’t really understand how investment works. You may want to seek outside advice to find out if this is a plan that is really right for you before you go into Plan 3. And again, since the DRS can’t make the decision for you, get some help from someone that can help you determine if that is the right plan for you.
Seth
So when a person calls in and they’re trying to make this choice, it seems like to me oftentimes people will just ask their coworker, they’ll ask their neighbor, or they’ll ask their mom or dad or maybe sometimes their mom or dad will tell them what plan to choose. There’s a lot of outside influences. I think, when people are making these choices.
And one thing I heard someone say once is that neither of these plans are bad, they’re just different. And I think that’s one of the things that sometimes overwhelms new hires that they’re like, it is a lifetime decision. Like once you make this choice, this is going to be your plan for as long as you’re here, as long as you’re working for your school or your city or your county or wherever you’re working as a public employee.
And so that that can feel like a lot of pressure. But I know from working here, one of the things I oftentimes see with new employees is they stress about this decision a lot, Like it’s not just people who are calling it, it’s people who are sitting down next to you and they’ve asked you just as a neighbor, as a friend, as a colleague, what do I choose?
And once again, I think you would go back to we can’t tell you what to do, but how do you help people kind of reduce some of that stress, I guess.
Kimm
Provided that they’re calling at the beginning of their hire? Yeah. And they have that full 90 days, I really encourage them to seek financial certified, licensed financial advice on how investments work before you make that lifetime commitment to what you’re going to do with your pension.
Seth
Yeah. You know, one of the things we haven’t touched on is with Plan 3, we mentioned that you have an investment portion that’s that second bucket of money, but you also have to choose how much you’re going to put in. And I know we’ve certainly seen you probably had this conversation a lot of times where people choose a percentage and then they’re like, Oh…whoops.
Either too much or too little, or they want to change that. But…
Jenny
But you can still change your percentage, right?
Seth
No, you know so in Plan 3, you’re locked in. It’s an IRS rule that you have to stay with the percentage. But, if you want to add more, you can always put money into DCP or some additional savings vehicle. They’re stressed at the front end about having to make a decision that locks them in and they forget that there’s these other vehicles where if they want to save more, they’ve got that opportunity to do it later on.
And the great thing with DCP is we’ve talked about a lot of times on the podcast already is that you can change that amount at any time you go up or down however your budget. But I mean, I know Kimm, you’ve probably had a number of conversations with folks who: “well, I chose 15% and then I saw how much that was coming out of my check.
And now I’m struggling to pay my bills.” And not thinking about that kind of whole budget. Like I know when I started. It always seems like the advice for retirement is: save as much as you can early on. But if somebody chooses Plan 3 and chooses 15%, that might be too much for where they’re at in their life.
I don’t know. Do you have a story or a thought about that?
Kimm
Absolutely. Members will call in in that same instance. And “how do I how do I increase that? I’m getting closer to retirement and I didn’t put enough in” or “how do I decrease that? I’ve got years before I’m retiring and I can’t afford to live with 15%.” Unfortunately, once you make that election, it is irrevocable. Unless you change employers.
As long as you change employers, you are able to change the percentage. But as long as you are with that employer, you cannot change a percentage. That includes staying with the employer and going to a different position. You still cannot change that percentage. You must go to a completely new employer to change out positions. So that is something that you really want to think about in the beginning.
You really want to just decide what you want to put in.
Jenny
Yeah. So if I’m working for the Department of Retirement Systems, then I can’t change that unless I decide, like if I decide to go become a teacher or work for a school under the School Employees’ Retirement System, then I could change. Is that what you’re saying? Yes. Okay.
Seth
And if you’re a teacher, So if you’re a teacher and you go from the Auburn School District to the Kent School District, then you can change your percentage. But if you’re in the Auburn School District at the high school and you go to the elementary school, you haven’t changed employers. I mean, it feels like I’ve got a new job, I’ve changed positions, but I’m still with the same employer.
Yes. As long as you’re still.
Jenny
And you’re still under the Teachers’ Retirement System plan. But you’re moving, say, like you said, from the Auburn School District to the…
Seth
If you go from one school to if you go from one employer or district to a…
Jenny
Different school district.
Seth
Then you.
Jenny
Can change. Yeah.
Seth
Yeah.
Kimm
And that’s a good point. That is something that does confuse many of our Plan 3 members within the Teachers’ Retirement System. They’re thinking that if they are with the same district but they go to a different school, that that constitutes a change They can make the adjustment. It’s pretty simple when you’re in the Public Employees because you’re going from Department of Retirement Systems to another department of… yeah, that’s pretty straightforward.
But a lot of times the teachers are a little confused that they must leave and go to a different district before they can make that change.
Jenny
Yeah, so same sort of thing. If I’m working for the Department of Retirement Systems and I decide that I’m going to go work for the Department of Ecology, then I could also choose to make that change, correct?
Kimm
Correct.
Seth
Yeah, but. But if you get promoted at DRS, then no. Yeah. And that’s I mean… I’ve certainly heard from people who’ve said, you know, that they’ve looked to change jobs. This has been a factor that they take into consideration cause they want to they want to save more for retirement or they, their budget is stretched and they need to lower their contributions.
And so they want to look for other employment. That’s really it’s an IRS rule and we’re kind of stuck with it. But that’s where DCP can really give you that additional flexibility of putting either more in for retirement or less and for retirement kind of that additional lever to pull one way or the other.
Jenny
Yeah. So I want to circle back and you know, we’re talking about you can only make this change if you’re changing employers and this only applies to Plan 3. Correct.
Kimm
One thing to keep in mind is even if you change jobs, you’re still in the Public Employees’ Retirement System and you were in Plan 3, you will stay in Plan 3. You cannot leave one employer and go to another employer and now go to Plan 2. The only thing you can change is the contribution rate when you go to that new employer.
Jenny
If you’re in Plan 2, your contributions are going to stay the same for your… at least for that particular…correct? For your retirement system…
Seth
This is one of the things that I think confuses folks. The Plan 2 contribution rate is set by the state and it can change every two years.
Jenny
Right. But it’s not up to me. I don’t have to worry about it. It’s just going to be whatever the state decides.
Seth
That’s a really good point. And I think sometimes one of the reasons people sometimes choose Plan 3 is because they don’t want their contribution rate to change at all. So they say, “I want to be at 7%” or “I want to be at 5%. I want to know I have a set amount coming out of my salary.”
And one of the ways I oftentimes have described it to people is that in Plan 3, you’re giving up some certainty on what you’re going to get at time of retirement, but you’re getting more certainty on what’s coming out of your check while you’re working.
Kimm
Good point.
Seth
And Plan 2 is kind of the opposite. You give up some security or certainty on what’s coming out of your check, but you gain that additional security on knowing what you’re going to receive in your formula. You got this 2% set formula where Plan 3, you’ve got this two-part benefit, your pension and your investment account. So there’s that different certainty.
And that’s I think a lot of times what people when they look at these two plans, they just look at the pension part and they say, “well, 2% is bigger than 1%. Of course I’m going to choose the amount that’s bigger.” But I know I’m sure you’ve retired people or talked to people who are close to retirement. And when you look at both parts of their benefit together, they were better off being a Plan 3 member than a Plan 2 member.
But you only know that once you actually get to retirement, which is the hard part.
Jenny
Which goes back to the whole conversation of speaking with a financial planner about your specific situation. So is it safe to say in general that Plan 2 is sort of a set it and forget it? And Plan 3 is if you want to have a little bit more of a hand in your retirement account?
Kimm
That’s a good way to look at it. That’s that is safe to say.
Seth
Yes, I think that’s a really good way to think about it. The thing I always want to stress to people, though, is you still need to know the way your plan works. Yeah, what you’re saying is true if you have a 40 year career.
Kimm
So what I would say to that is, again, that goes back to my first question to the member to think about what are your career goals? How long do you plan to work for the state? Are you going to work five years, ten years, 20 years or 30 years? That is something that you want to consider on the front end so that it helps you to make the decision on whether Plan 2 or Plan 3 would be better for you.
On our website, on the DRS website, there are some very good tools and there’s a plan choice tool that shows you side by side your benefit calculation 2% versus 1%. It also shows you that for Plan 2, you either take your pension or you take your money. Plan 3, you get your pension and you get your money. A few of the other things that are in there is Plan 2, as Seth was mentioning, your contribution rate is set by legislature.
You can’t increase or decrease no matter what. Plan 3, you do get to choose at the front end and then you cannot change it unless you change actual employers. And then one of the other things that I usually will mention to our members that is out there and it’s something that’s a little newer that not a lot of our members are aware of is if you separate from either Plan 2 or Plan 3 and you are not yet age eligible, age 65 and you’re going to delay drawing your benefit until you do become age eligible, you would lose the opportunity to continue your state health care in Plan 2.
If you separate and delay drawing. But in Plan 3, you can separate and delay and you are still eligible to receive your state’s coverage for health care. And again, a lot of good information on the DRS website and that is mentioned in the Choose a Plan. Plan 2 versus Plan 3. There’s some really good side by side comparison for each aspect of how the Plan 2 and the Plan 3 lay out.
Seth
I think the real thing for people to remember once again is that there are just different features of these plans and there isn’t necessarily a right answer or wrong answer, which I think is really oftentimes uncomfortable for people. And I know in some of my more devilish moments with new employees at DRS who are really like stressing about this for a long time, it’s like… I just them: “flip a coin.”
Like, honestly, like they’re both good plans and then learn everything you can about that plan. And can you kind of were alluding to this earlier. It’s not just the people who just started employment that sometimes have these questions. There are people who are ten or 15 or 20 years and they have like buyer’s remorse. They feel like, “oh, I made the wrong decision and I really wish I would have done this or I would have done that.”
And in some ways that’s like just beating yourself up. There’s nothing you can do about the past. You just have to look, “What can I do from this point going forward?” Can I save more in DCP? Oh, I’m thinking about…yeah, if I’m thinking about changing jobs, then maybe I have a different choice.
Jenny
Or if you want to save more for retirement, DCP is a great option!
Kimm
Yeah, absolutely. It can be stressful and it’s a lot of pressure, but it’s your life savings, It’s your retirement plan. Take that extra time, do the extra work, use the multiple tools that DRS has out there to help educate you on this and then seek outside financial help with someone that can answer the question of what decision should I make?
Since we here at DRS cannot answer that question for you. You have 90 days to do your homework and do some research. DRS is always willing and happy to help kind of sort out some of the questions that you have when you’re looking at the side-by-side comparison. And we never have a problem doing that for our members.
But you’ve got 90 days, do your homework, do a little research, ask the professionals that can give you advice before you make that decision.
Seth
The 90 day choice is a really good point, because when you’re a new employee, you have so many decisions to make. But a lot of those decisions you have to make in a week or 30 days. And it might be worth saying, “Hey, I’m going to put a reminder on my calendar 45 days from now or 60 days from now when things have settled down a little bit in my life.” Because there’s so much other stuff that you’re going through when you’re a new employee and saying, “okay, now I’m going to go back to this decision or I’m going to I’m going to poke around a little bit with it.
For the first 30 days of the first 60 days, I’m going to watch a video on the IRS’s website or I’m going to talk to some colleagues and kind of try to learn a little bit more about this.” But give yourself that time and grace, because one of things we haven’t talked about is that if you don’t make a choice within that 90 days, you will become a Plan 2 member and that will be your plan going forward.
This is something that changed, that used to be Plan 3 in the past after 90 days. And so for so for some of our folks who are listeners who have been employees for a long time, the retirement rules change sometimes. And so it’s important to stay up to date. It’s another good reason to do some research and learn about it.
90 days feels like it could be a bit of a rush, but take care of those other decisions that are really pressing and then give yourself some time to think about retirement.
So I appreciate that you came in and talked to us Kimm. We’re hoping to bring more DRS employees in and talk about these common topics. And so if you have questions, it’s drs.podcasts@www.drs.wa.gov.
Jenny
Podcasts, plural.
Seth
Podcasts. Yes. Never get that right. But we’ve been getting great questions and I really appreciate that our listeners are continuing to engage.
Jenny
And the last thing I’ll mention too is that we have regular webinars that’s about choosing a plan, making that choice between 2 and 3. And you can sign up for a live webinar where you can go get your questions answered, or you can also watch a pre-recorded version of the webinar on the website. Well, thank you Kimm. We really appreciate your wealth of knowledge
Jenny
And just being here today to be on the podcast.
Kimm
Thank you for having me.
Seth
Awesome.
Jenny
Thanks.
[music outro]
Disclaimer
Thanks for listening. And now we’d love to hear from you. What topics would you like to hear about? What questions do you have for us? Send an email to drs.podcasts@drs.wa.gov that’s drs.podcasts@drs.wa.gov. The Department of Retirement Systems provides this podcast as a public service, but it’s neither a legal interpretation nor a statement of DRS policy.
References to any specific product or entity do not constitute an endorsement or recommendation. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Views and opinions expressed by DRS employees are those of the employees and do not necessarily reflect the view of DRS or any of its officials.
