Military prepares for overhaul in retirement benefits

U.S. Armed Forces – Get Ready to Salute the 401(k).

Photo by Fort Rucker via Flickr.

Photo by Fort Rucker via Flickr.

The military, which currently has a traditional defined benefit plan, will adopt a new hybrid program next year that blends an existing defined benefit for career personnel with a matching contribution to a 401(k)-style account aimed at covering those who don’t make a lifelong career of the military. It’s the biggest overhaul in retirement benefits in years–and it’s a mix of good and bad news for military personnel.

Unlike the private sector, the legacy defined benefit actually is called a retirement pay system. That’s because retired military personnel are classified as inactive ready reserve who can be recalled in case of national emergency. And, retirement pay can be suspended under certain circumstances–for example, if a recipient begins to receive a disability benefit or is convicted of certain crimes.

Retirement pay essentially is a generous defined benefit pension with cost-of-living adjustments, but it has been available only to military personnel who serve at least 20 years. That means it has been available to a relatively small percentage of Americans who serve: 30% of commissioned officers and 8.5% of enlisted personnel, according to Lt. Col. Steven G. Hanson, who oversees compensation and benefit matters for the U.S. Army. Bottom line: just 20% of the entire armed forces have been getting any kind of retirement benefit at all.

Under the new blended system, the value of defined benefit retirement pay will be cut by 20 percent to make way for matching contributions to service members’ defined contribution accounts.

“We feel the change will have a very positive net effect,” Hanson says. “The new system preserves a defined benefit system even though so many private sector companies are ditching it–and we’re adding a competitive plan combining defined benefit and defined contribution.”

However, the changes do involve some pain–starting with the haircut to defined benefit retirement pay. But some observers worry that the defined contribution system will face challenges similar to those facing private sector plans–and they question the military’s readiness to educate personnel about how to use the new system.

Here are the key changes.

  • Reduced multiplier for pensions. The old system awarded pensions based on multiplier of 2.5% percent for each year of service; that will be cut to 2.0%–a reduction of 20% in the pension annuity.
  • Participation in the Thrift Savings Plan. Military personnel already have access to the federal Thrift Savings Plan, a defined contribution plan which is widely admired for its
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