Lawmakers are debating major reforms to the military retirement system, proposing a new system that combines the current defined benefit plan with elements of a 401(k).
On April 22, the Committee on Armed Services Subcommittee for Military Personnel released proposals for the National Defense Authorization Act for fiscal 2016.
“The Military Personnel proposal is a vital part of the NDAA supporting and protecting our warfighters with the care and benefits they need, deserve and have earned,” according to a statement from the subcommittee. Among various proposals raised is one to “reform the military retirement system to provide service members with a portable 401(k)-like benefit while retaining a defined retirement benefit at 20 years of service in an effort to help recruit and retain the best and the brightest in our Armed Forces and to ease their transition into civilian life.”
Military Times reported on Monday that the chairman of the Committee on Armed Services, Rep. Mac Thornberry, R-Texas, said, “This is the sort of change that isn’t going to save a lot of money, but it’s designed to attract and keep up the quality of talent in the military.”
The Military Compensation and Retirement Modernization Commission released a report in January that proposed major changes to the way servicemembers are compensated, including a shift from a defined benefit style retirement plan to a mix of defined benefit and defined contribution features.
The report noted that “profound and constant change” since the all-volunteer force was established over 40 years ago and the pressures of a 13-year war are driving the overhaul.
Currently, servicemembers are only eligible for retirement benefits after they’ve completed 20 years of service. An April 2014 report by the Department of Defense Office of the Actuary found that as of September 2012, 49% of new officers and 17% of new enlistees serve 20 years or more and become eligible for nondisability retirement.
Cliff vesting occurs much earlier in private sector DB plans. The report pointed out that private-sector DB plans are required to cliff vest by five years of employment or to gradually vest during a seven-year period. DC plans must cliff vest within three years.
“As a result of these shorter private-sector vesting times, a much higher percentage of private-sector employees receive some type of retirement benefit, as compared to Service members who can only receive the retirement annuity upon reaching 20 [years of service],” according to the report.
The current DB style retirement plan provides annuity payments to military retirees beginning the month after retirement begins. They’re generally calculated by multiplying the retired pay base by 2.5% for each year of creditable service.
The House’s proposal would blend the current system with a defined contribution system by allowing servicemembers to contribute to the Thrift Savings Plan with a matching contribution from the government, which they currently don’t receive; offering lump-sum “career continuation pay and retention bonuses” at defined milestones; and provide “mandatory lump-sum career continuation pay after 12 years of service with an agreement by the service member to continue in service for 4 more years,” according to the subcommittee markup.
The proposal requires a report to be filed by March 1, 2016, to the Committees on Armed Service of the Senate and the House of Representatives, the Committee on Energy and Commerce, the Committee on Natural Resources and the Committee on Transportation and Infrastructure of the House of Representatives. Implementation would be expected by Oct. 1, 2017. Current servicemembers would be able to be grandfathered into the current system.
The committee will meet on Wednesday to consider the proposal.
Scott Spiker, CEO of First Command Financial Services, said that the shift from defined benefit to defined contribution is “not new news.”
“We’ve seen a mirror image of this play out through the private sector,” he told ThinkAdvisor on Monday. “This is a change from a 20-year cliff vesting program with a defined benefit plan at the back end that has been in place for about 80 years, to a defined contribution plan with different optionality.”
Thrift Savings Plan
Servicemembers currently have a defined contribution option available through the Thrift Savings Plan, which has been open to members of the military since 2000. However, military investors in TSP don’t receive employer contributions from the Armed Services, although other federal employees do.
According to financial statements for the Thrift Savings Plan, there were approximately 4.6 million participants in the TSP plan in 2013 and 2012, although the report didn’t provide a breakdown of military versus nonmilitary participants. By comparison, the Investment Company Institute found that in 2012, there were about 52 million Americans participating in a 401(k) plan.
Spiker said that only 38% of those eligible to participate in TSP actually do. Furthermore, 43% of assets invested in TSP by military participants are held in the “G Fund,” Spiker said. The fund is a “special Treasury security that doesn’t behave like fixed income and it effectively means they are locking themselves below the rate of inflation forevermore.”