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 House Committee on Armed Services Subcommittee for Military Personnel released proposals for the National Defense Authorization Act for fiscal year 2016.
“The Military Personnel proposal is a vital part of the NDAA supporting and protecting our war fighters 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 servicemembers 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.”
The Military Compensation and Retirement Modernization Commission (MCRMC) 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.
Sen. Lindsey Graham, R-S.C., said in mid-May that the Senate’s draft of the 2016 defense authorization bill will include changes to retirement benefits based on those recommendations, Military Times reported.
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.
In the private sector, DB plans are required to begin such cliff vesting after only five years of employment or to gradually vest during a seven-year period, according to the MCRMC report. 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 servicemembers 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 servicemember to continue in service for 4 more years,” according to the subcommittee markup. Current servicemembers would be able to be grandfathered into the current system.
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.com in April.
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, 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.