Opting in sooner for blended retirement can add value
Next week 900,000 active duty service members and 700,000 drilling Reserve and Guard members become eligible to opt out of a rigid yet more valuable High-3 military retirement plan into the new portable Blended Retirement System (BRS) with government matching of thrift savings contributions and early vesting.
There's no need to rush that decision. The window for switching plans will be open for all of 2018 and the choice, once made, will be irreversible.
However, for service members who fully understand details of the BRS and plan to opt in, there are dollars to be lost if they delay unnecessarily.
"For those who do know they definitely want to opt into the Blended Retirement System, we would say there are advantages in opting in earlier rather than later," said Jerilyn B. Busch, director for military compensation policy in the Office of the Secretary of Defense. "The sooner they opt in, the sooner the government's automatic one-percent contribution and matching contributions [to the Thrift Savings Plan] begin, and the sooner they begin to accrue earnings, not only on government contributions but on their own contributions."
BRS enrollment is automatic for new entrants on or after Jan. 1. Persons in the force before 2018 can switch to the BRS from High-3 if they have fewer than 12 years as of Dec. 31, 2017, or, for Selected Reserve personnel, if they have fewer than 4,320 points toward retirement as 2017 ends.
Members who opt into the BRS will get an automatic one percent of basic pay government contribution to their Thrift Savings Plan, and government matching of some TSP contributions, starting in their first pay period after the switch.
"So, if somebody opts in on Jan. 3rd, they'll see it in their 15 February pay day because the first pay period will begin 1 February," Busch explained.
For new entrants on or after Jan. 1, the one percent automatic government contribution will begin 60 days after enrollment and government matching of TSP contributions won't begin until after two years of service.
That two-year delay of TSP matching doesn't impact BRS participants who joined the military before Jan. 1, 2018.
Service members who opt into BRS and contribute a portion of basic pay to their TSP account will see their service branch match up to four percent: a full match on the first three percent contributed and one percent match on the next two percent of basic pay contributed. Therefore, the maximum government contribution, including the automatic one percent, will be five percent of basic pay.
Members who opt into BRS will be vested immediately in their contributions, in service matching of contributions and in earnings on them. Members will be vested in the one percent automatic government contribution after two years of service, or immediately if the member already has served two years.
"I am not a financial advisor," Busch said. "But I think the old adage of 'Save early, save often' applies. …The fundamental premise behind a 401k-type plan or Thrift Savings Plan is that individuals need to be contributing steadily and over the long term to reap of the benefits of the power of compounding."
In our interview, Busch noted the Defense Department "does not take a position on which retirement system is best for individuals. This is a personal financial decision and varies according to personal circumstance.
"However, it is the department's position that each member and their families need to make a well-informed decision. For that, we have put all kinds of resources out there that will help our members become informed."
Before any current member can switch retirements, they must have completed the online "BRS Opt-In Course," which provides enough information "to make an educated decision about their retirement system," course designers claim.
But at: http://militarypay.defense.gov/blendedretirement other resources include a calculator to compare values of the BRS with the High-3 plan, adjusting for individual circumstances and factors such as return on TSP investments and timing of promotion or advancements. There also are informational graphics, answers to frequently-asked questions and a video series on the retirement choice. And service members with questions about the BRS or other financial issues can telephone trained financial counselors toll free anytime at: 1-800-342-9647.
High-3 provides a more generous lifetime benefit. But like earlier military retirement plans its great flaw is cliff vesting. Only if members who complete 20 or more years can leave with any retirement benefit. Overall, 19 percent of new entrants historically qualify.
"Under the BRS that will shift to 85 percent of our members. That's a big deal," Busch said.
The BRS still provides a lifetime annuity after 20 or more years served but it is worth 20 percent less than annuities under High-3. But the BRS also offers government matching of some TSP contributions through the 26th year of service. And members can take TSP balances on leaving service early and roll them into employer-sponsored 401k plans in government or the private sector.
BRS participants also will be offered one-time continuation pay at mid-career in exchange for extending service obligations. The lump sum pay, at a minimum, will equal 2.5 times monthly basic pay but service branches have flexibility to set it as high as 13 times monthly basic pay when needed. They also can offer the continuation pay anytime between the 8th to the 12th year of service, depending on retention rates and career manning requirements across their job specialties.
For 2018, every service branch except one will offer a minimum continuation pay for BRS enrollees at the 12-year mark. Public Health Service will offer the minimum payment too but at 10 years of service.
Service members should weigh many factors in considering whether to opt into the BRS. One is how likely they are to serve full careers. Another is whether they have enough years left in service so a TSP with government matching, plus continuation pay, is a reasonable trade off against a 20 percent cut in lifetime annuities if they do serve long enough to retire.
The comparison calculator allows individuals to weigh the value of reduced annuities against the special features of the BRS. A career-minded E-7, for example, might be less tempted by roughly $10,000 at the 12-year mark, perhaps to cut credit card debt, if he can see the life-long impact on his retired pay.
Someone planning to stay for a full career, Busch said, "will want to give due consideration to that pension when they retire. Someone who doesn't plan to stay for 20 years should give consideration to the fact that the defined contribution component, through TSP, is vested much earlier and it's portable."
Members staying with High-3 don't need to do anything. Army, Air Force and Navy members will opt into BRS through MyPay. Marines will opt in using Marine-On-Line (MOL). Coast Guard and NOAA members will use their Direct Access system, and Public Health Service officers must contact their compensation branch.