In 2011 with the inauguration of Rick Scott and a Republican Legislature,
the Florida Retirement System started to change. These changes were predicated
on the aftermath of 2008 on the state’s finances. The market decline
during 2008 and 2009 dramatically reduced the value of the FRS Pension
Plan assets from about $135 billion to under $100 billion. As a result,
politicians embarked on a cost cutting spree that effectively reduced
your retirement benefits. The effect of these changes on employees depended
on whether they were in the Pension Plan, DROP or the Investment Plan.
These changes still remain in place despite the improvement in state finances
and the value of Pension Plan assets returning to over $140 billion.
The single biggest change was the requirement for all state employees to
contribute 3% of their salary to the Florida Retirement System. For those
in the Investment Plan, these monies go into their own account. For those
in the Pension Plan, those monies go into the general fund of the Pension
Plan. This required contribution did not apply to those employees who
were currently on DROP. This required contribution continues to effectively
act as a 3% reduction in one’s salary. For most employees that was
particularly tough to take over the past few years given the absence of
any salary increases.
Meanwhile, the biggest change for those under the Pension Plan was the
effective elimination of the Cost of Living (COLA) of 3% per year that
is part of the calculation of one’s Pension Plan benefit.
While the original legislation stipulated that this was a five year suspension
ending in 2016, by requiring legislative action to bring the COLA back,
it effectively served as an elimination of this benefit. The effect of
this change is to prorate an employee’s COLA benefit across their
total number of service years.
For example, if you have 25 years of service as of July 1, 2011 and worked
another 5 years, your COLA benefit under the FRS Pension Plan would decrease
to about 2.5% per year from the current 3%. Given that the value of the
Pension Plan assets have returned to a value greater than what they were
before the 2008-2009 financial crisis, the COLA benefit should arguably
return. Unfortunately, there is no discussion in Tallahassee to do so.
Employees who choose to go on DROP are also affected by these legislative
changes as well. Prior to 2011, DROP monies earned a guaranteed rate of
return of 6.5%. After 2011, this rate dropped dramatically to just 1.3%.
Over the five year DROP period, this 5.2% annual differential has a dramatic
effect on reducing DROP values.
Investment Plan members were able to escape the effect of the 2011 legislative
changes but in 2012 politicians caught up with them. In 2012, House Bill
5005 reduced the contribution paid by employers into the Investment Plan
by a whopping 30%! Prior to July 1, 2012, the total contributions (including
the mandatory 3% employee contribution) to one’s Investment Plan
account was 20% for special risk employees and 9% for regular class employees.
After July 1, 2012 those contribution rates declined to 14% and 6.3% respectively.
These levels include the mandatory 3% employee contribution.
While billed as a necessary change to level the benefits between the Pension
Plan and the Investment Plan, it served to disproportionately undermine
the benefits of the Investment Plan. In addition, these changes in contribution
rates were buried in legislation that was passed at the 11
th hour and largely occurred without much discussion with the affected employees.
Of course, the deal is also different for new State employees as well.
For those entering FRS employment on or after July 1, 2011, the vesting
under the FRS Pension Plan increased to 8 years from 6 years. Vesting
under the FRS Investment Plan remains at one year. In addition, average
final compensation under the FRS Pension Plan increased to the 8 highest
years of service from the 5 highest years. The age eligibility for retirement
increased from age 62 to age 65 for regular class and from age 55 to age
60 for special risk. The retirement eligibility based on years of creditable
service increased from 30 years to 33 years for regular class and from
25 years to 30 years for special risk. New FRS employees will need to
work longer in order to receive comparable benefits available to current
The bottom line on all these changes is that it affects your decision and
timing on making any changes to your retirement. In the past, when employer
contribution rates to the Investment Plan were 30% higher, the timing
of any switch to the Investment Plan was somewhat immaterial. Now, the
timing of the switch really matters. Over the years we have reviewed countless
individual comparisons and while each situation is unique, based on these
reviews, it seems that any move to the Investment Plan needs to be either
at the inception of your career or at the end. This also preserves your
second election to switch among the FRS options for future use as well.
At the beginning of your FRS career you have time to generate a sufficient
balance in your Investment Plan and can take advantage of its shorter
vesting requirements. In fact, we have seen some scenarios of late where
employees who had initially started with the Investment Plan had the opportunity
after 10-15 years to buy back into the Pension Plan and retain a significant
portion of their Investment Plan balance.
In contrast, those that wait to switch at their 25
th year of service (30 years if not special risk) experience the largest
run up in their projected lump sum balance in the last five years of service.
After hitting these full retirement service years, the projected balance
rises at a rate similar to inflation. In those cases, it may make sense
to make a move in that 25
th (or 30
th) year of service if an employee wants to go into the Investment Plan.
The hardest scenarios are those with 15 years or so of service. For them,
it probably makes sense to just wait things out before considering any
move among the FRS options.
Where indicated, market data and performance represents past performance
which is no guarantee of future results. Individual results may vary and
values do fluctuate in any investment. This booklet contains our most
current understanding of the Florida Retirement System and U.S. tax laws
as of October, 2016. This booklet is intended to detail complicated retirement
topics but is not a complete discussion as each individual’s situation
is different and various exceptions exist. Nelson Financial Planning offers
securities through Nelson Ivest Brokerage Services, Inc., a member of
FINRA/SIPC. Please note that the information provided in this document
has not been approved or endorsed by the State of Florida or the Florida