Updated: September 1, 2018
Issue: In August of 2018, Gov. Bruce Rauner signed legislation into law that requires TRS to set up and offer, “a defined contribution benefit to active members of the System.”
A defined contribution – “DC” – benefit is normally identified by the section of the federal tax code which authorizes the savings program – a 401(k) plan or a 403(b) plan, for instance.
This is the first time TRS has been authorized to offer a DC plan to its members. There is no timetable yet for the implementation of the new TRS DC Plan. The law requires TRS to offer the plan “as soon as practicable.”
Discussion: The new TRS DC Plan will be “an optional benefit to any member who chooses to participate” if the member is active in Tier 1, Tier 2 or Tier 3. Retired and inactive TRS members will not be eligible for the DC plan.
The new TRS DC plan will supplement the existing TRS defined benefit – “DB” – pension plan. The DC plan does not replace the DB plan for participating members. TRS members cannot opt out of the DB plan and place their DB contributions into the new DC plan. Members participating in the DC plan will still make payroll contributions to their DB pension.
Participants in the new DC plan will effectively have two TRS sources of income in retirement – a pension that guarantees a specified benefit every month, and a “savings account” that they can draw on as they see fit.
It will take some time for TRS to design and develop a DC plan. As a brand new offering, TRS will have to make substantial alterations in its IT capabilities; employer reporting system; member record-keeping; investment administration; communication to and interaction with members; and official reporting to members, state officials, stakeholders and the public.
The first alteration TRS must achieve in order to implement a DC plan is to convert its timetable for employer record reporting from annual to monthly. This is an extensive IT project. With both a DC plan and a DB plan, employers must report contributions made to TRS and service time accrued for all members. Since a DC plan is more exclusive to each member, a more frequent reconciliation of earnings, contributions and account balances is needed.
The law requires DC plan participants and their employers to make contributions to the DC plan. The size of the contributions by members and employers has not yet been established. No state funds will be contributed to the TRS DC plan.
The law requires TRS to “offer investment options” to participants. All fees to private companies managing the investments of the DC plan, as well as the cost of administering the plan, will be paid by member and employer contributions.