There has been much debate in recent years about the State of Alaska’s ability to attract and retain talent for state government jobs. One of the biggest issues to address is how employees receive benefits in their retirement years. The state has a tiered employee system based on the date of hire, and the benefits for which employees are eligible are affected by the employee’s “tier,” which may differ depending on whether the employee is a member of PERS (Public Employees’ Retirement System) or TRS (Teachers’ Retirement System).
The retirement benefit system for PERS tiers I, II, and III and/or TRS tiers I and II are outlined in a separate article. This article focuses on what the State refers to in official information as the DCR or Defined Contribution Retirement Plan tier. As it relates to retirement benefits, this would apply to PERS tier IV and TRS tier III employees. Please note: Not all nuances will be covered here, so it’s always best to consult the official information on the Division of Retirement and Benefits, or DRB, page(s) on the State website.
State employees hired after June 30, 2006, fall under the qualification of “DCR employee” for retirement benefits. While previous tiers were eligible for a defined benefit (pension) plan, those in the DCR qualification don’t currently qualify. Efforts are currently underway to add that component to the DCR employee benefits package, but to date, those efforts have yielded few results. So, what do you have available, and how might you supplement those plans with savings outside of the workplace?
Supplemental Annuity Plan (SBS)-
This plan is effectively your replacement for Social Security, which the State of Alaska opted out of beginning Jan 1, 1980. Social Security, a federal program, guarantees a monthly income for the remainder of the recipient’s life, but the SBS account, a state-sponsored plan, will have to be managed effectively to provide similar income over a similar period.
The contribution amounts for the SBS are consistent across employment tiers, with 6.13% of your wages matched by a 6.13% contribution from the State, up to the Social Security maximum wage base (which changes annually). In total, you’ll have 12.26% of your total income contributed to this account.
How you choose to handle this account in retirement is also important, so consult your planner or financial professional to discuss the available options. Every dollar distributed will be subject to federal income tax, and there will be Required Minimum Distributions starting at the stipulated age (currently age 73).
Defined Contribution Retirement (DCR) Plan-
This account is intended to replace the State’s defined benefit plan (pension benefit). Instead of a guaranteed monthly amount, you’ll have a pool of funds from which you can provide ongoing income. One of the benefits of this approach, when compared to a pension, is that you have more flexibility and control over when and how this money is distributed. On the flip side, the lack of guaranteed income over your lifespan requires thoughtful planning on your end, taking into consideration your other available resources.
Under both PERS and TRS, 8% of your gross earnings are contributed to the DCR Plan. Interestingly, the state contribution differs for PERS and TRS employees, with the state contributing 5% for PERS employees and 7% for TRS employees. PERS employees will have a total of 13% of their total compensation contributed to this account, while TRS employees will see a 15% total contribution.
Deferred Compensation Plan-
Here’s where things can get confusing, because this option is separate from both the SBS and Defined Contribution plans, even though it sounds like the latter. This plan is governed by IRC Section 457, but is akin to a private sector 401(k) plan. The Deferred Comp plan has similar annual contribution limits to a 401k, with some differences related to “catch-up” contribution options.
So far, you’ve contributed 13.3% of your total income to the SBS and DCR accounts, with the state having matched that in varying percentages based on your PERS or TRS status. If your monthly cash flow allows you the ability to make additional contributions to a retirement plan, the Deferred Comp plan may be a good option for you.
The contributions can be pre-tax, but the plan also has an after-tax (or Roth) option. It’s always good to consult your financial professional when deciding which of these options is best for your circumstances. Utilizing this plan can help ensure you have the necessary wealth to fund your retirement at the end of your career.
Generally Applicable:
Investment Options- Each of these plans is considered a participant-directed account. You can choose the investments on your own (limited to the options available within the plan) or utilize the fund management options offered. You can also engage a financial professional to discuss how to best allocate your current account balance and future contributions. For the most part you’ll see similar investments available between all three plans, though there are some minor differences.
Fees- The State of Alaska has done a good job of building plans with low internal costs (the same cannot always be said for private-sector retirement plans). Each of the three accounts has a 0.11% annual fee, plus the internal investment option fees. The Deferred Comp and Defined Contribution plan accounts also have a $35 annual administration fee for actively contributing employees ($25 annually for non-contributing employees).
Vesting- While you may be contributing to these accounts regularly, it’s not a given that you’re entitled to the full account balance. Each of these handles “vesting” (the time at which you’re entitled to the full account balance) differently. Typically, contributions you’ve made are immediately 100% vested, so those funds are yours. However, for the Defined Contribution Plan account, the state’s matching contributions vest over 5 years. For the DCP you’re eligible for 25% of the state’s contributions after year 2, 50% after year 3, 75% after year 4, and 100% after the fifth year of employment.
Taxes- Most of the funds saved in these plan options are pre-tax, which means they’ll be fully taxable upon withdrawal from the account. The exception would be the Roth option within the Deferred Comp plan. Consult with your financial professionals to develop the appropriate distribution plan for your circumstances.
Other Savings- While not unique to you, there are several other savings options available for you to meet your goals. Whether you contribute to a traditional IRA, a Roth IRA, make deposits to a traditional brokerage account, or utilize one of the many other savings vehicles at your disposal, planning for your future is crucial for achieving the financial independence that most seek. Please consult your financial planner to discuss which of the available options is best for you.
Please Note- There may be nuanced differences in your benefits depending on your employment class and whether/which union contract may apply. Please utilize the resources provided by the State of Alaska and/or your union to supplement this information. This can be particularly true with health benefits, life insurance coverages, and other ancillary benefits for which you may be eligible.
As noted earlier, this is not an exhaustive analysis of each of these plans but should give you an overview of the options for which you’re signing up. Alaska’s lawmakers are under pressure to address the lack of a defined benefit (pension) plan for DCR employees, with a bill being passed in the Alaska Senate as recently as February 2024 (though it seems unlikely to make it through the Alaska House or to be signed by the current governor). Regardless, there are still ample opportunities for you to save towards your financial independence, and to do so with maximum flexibility and control over how the funds are used. The tradeoff is that you’ll have little in the way of guaranteed income unless you opt to use the annuity options within the SBS plan. Confused on where to start? Reach out to The Planning Center and we’d be happy to help you navigate the waters.
