September 16, 2009 |
2009-R-0331 | |
STATE OF CONNECTICUT ALTERNATE RETIREMENT PLAN | ||
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By: Judith Lohman, Chief Analyst | ||
You asked for background information on the state's Alternate Retirement Plan (ARP), including (1) which state employees are eligible to participate in the plan, (2) what benefits it offers, and (3) how it compares to other state retirement plans.
THE ALTERNATE RETIREMENT PLAN (ARP)
The ARP is the state's only defined contribution retirement plan.
A defined contribution retirement plan does not promise participants a specific amount of benefits at retirement. (Plans that offer specific benefits are known as defined benefit plans.) Instead, employees and employers contribute a percentage of the employee's annual salary to an account. The account is invested on the employee's behalf in investments the employee chooses from options offered by the employer or its third-party plan administrator. The account's value fluctuates according to changes in the value of the investments.
When the employee retires, or when another “distributable event,” such as the employee's death, divorce, or separation from employment, occurs, he or she receives the account balance, consisting of contributions plus or minus investment earnings. Contributions to, and investment earnings accruing in, the account are not taxed until distributed.
Unlike other state pension plans, the ARP requires no vesting period. It is portable, allowing a participant to roll over his or her account balance to another such plan or to an individual retirement account when the employee retires or leaves employment. This portability benefits employees who change jobs and employers several times during their careers.
The state established the ARP on October 1, 1975. By law, it is available only to faculty and professional staff members employed within the Connecticut higher education system and to central office staff of the Department of Higher Education (DHE). Eligible employees must elect to participate in the ARP within six months after their employment date. If they do not choose the ARP, they must participate in the State Employees Retirement System (SERS) or, if they qualify, in the Teachers' Retirement System (TRS).
Like SERS, but not TRS, the ARP is overseen by the State Employees Retirement Commission and the state comptroller (CGS § 5-155a (c)). The retirement commission contracts with a third-party plan administrator to manage the investment options and other aspects of the ARP. Originally, the Teachers' Insurance & Annuity Association and College Retirement Equity Fund (TIAA-CREF) was the ARP's third-party administrator. But on January 1, 2006, the State Retirement Commission transferred the ARP contract to ING Life Insurance and Annuity Company, which also administers the deferred compensation plan for state employees.
Each ARP participant contributes 5% of his or her annual salary to the plan and the state contributes 8% for a 13% combined annual contribution for each employee. Contributions are pre-tax. The Internal Revenue Service adjusts the annual contribution limit each year for inflation. For 2009, the maximum contribution is $49,000 or 100% of an employee's covered compensation, whichever is less. The maximum covered compensation (also adjusted annually by the IRS) is $245,000 for ARP participants hired on or after January 1, 1996.
ALTERNATE RETIREMENT PLAN COMPARED TO THE STATE EMPLOYEE AND TEACHER RETIREMENT SYSTEMS
Table 1, below, compares the major features of the ARP, Tier IIA of the State Employees Retirement System, and the Teachers' Retirement System. The latter two plans are defined benefit plans. In those plans, members' monthly retirement benefits are calculated using a formula based on their years of credited service in the system and their average salary in the last years of employment before retirement.
Table 1: Comparison of Major Features of Three State Retirement Plans
Plan Component |
Alternate Retirement Plan |
State Employees' Retirement System, Tier IIA |
Teachers' Retirement System |
Plan Type |
Defined Contribution |
Defined Benefit |
Defined Benefit |
Members |
Faculty and professional employees of state higher education constituent units and the DHE. |
Full and part-time state employees hired after June 30, 1997. |
Public school employees who (1) hold positions requiring a teaching certificate, (2) hold the appropriate certification for the position, and (3) are employed at least half-time |
Social Security/ Medicare Coverage |
Yes |
Yes |
Medicare only |
Vesting Period |
None |
5 years actual state service |
10 years CT service |
Employee Contribution |
5% |
Regular: 2% Hazardous duty: 5% |
7.25% |
State Contribution |
8% of each member's salary |
Actuarially determined |
Actuarially determined |
Choice of Investment Options |
Yes |
No |
No |
Investment Method |
Employee-directed, menu of mutual or annuity funds |
Professionally managed |
Professionally managed |
Investment Risk |
Employee |
Employer |
Employer |
Types of Retirement |
Annuity, Optional lump sum payment of up to 10% of accumulated funds |
Normal, age 70, early, and hazardous duty |
Normal, early, and proratable |
Retirement Qualifications (Age/Years of Service) |
Normal: 65/any Early: 55/5 years of participation |
Normal: 60/25 vesting; 62/10 vesting; 62/5 actual Age 70: 70/5 vesting Early: 55/10 vesting Hazardous Duty: Any/20 |
Normal: 60/20; Any/35 Early: 55/20; Any/25 Proratable: 60/10 |
Early retirement reduction |
If lump sum payment is withdrawn prior to age 59½, may be subject to 10% penalty under federal tax law |
25 or more years' service: 0.25% for each month prior to age 60 Less than 25 years' service: 0.25% for each month prior to age 62 |
30 years' service or less: 12% per year based on number of years away from normal retirement. More than 30 years' service: 6% for each year away from normal retirement |
Final Average Salary (FAS) |
Not applicable |
3 highest-paid years |
3 highest-paid years |
Normal Benefit Formula |
None |
35 years or less: (1.33% x FAS + 0.5% x FAS above annual breakpoint) x years More than 35 years: add 1.625% x FAS x years over 35 |
2% x FAS x Years of Service |
Benefit Form |
Flexible: lump sum, periodic, or monthly payment |
Monthly benefit payment |
Monthly benefit payment |
Annual COLA |
No |
Yes |
Yes |
Disability Retirement |
No, employer provided disability insurance policies may continue 13% contribution to plan during disability |
Yes, at any time for service-related disability, after 10 years vesting service for non-service-related disability |
Yes, disability allowance available |
Additional employee contributions allowed? |
No |
No |
Yes, voluntary after-tax contributions allowed |
Pre-retirement death benefit |
Account balance payable to spouse or named beneficiary, if applicable |
Spousal benefit if employee met age and service requirements for immediate retirement or completed 25 years of service (any age); otherwise contributions are refunded |
Yes, payment to spouse if employee met age and service requirements; otherwise survivorship benefit is paid |
Purchase of service credit |
Not applicable |
Allowed, with restrictions |
Allowed, with restrictions |
Rollovers from other plans |
Allowed |
Not allowed |
Not allowed |
Portability |
Yes, if employee separates from service before five years of plan participation |
None |
None |
ARP INVESTMENT OPTIONS
As previously mentioned, the benefits an ARP participant receives depend on the balance in his retirement account when it is distributed. Each ARP participant is responsible for directing how the combined annual employee and state contributions to his account are invested and may choose the investments from options offered by the plan's administrator.
ING currently offers 24 investment options for ARP members in the following four categories:
1. a stable value fund, which pays a fixed interest rate of at least 3% annually;
2. five “target date” lifecycle funds;
3. seven passively managed index funds; and
4. 11 actively managed mutual funds.
A complete list of the 24 funds, including the annual fund expense and asset class, is attached.
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