Understanding and selecting a retirement program is an important task for new employees. If you are a newly-eligible contract classified, classified non-union or GCIU bargaining unit employee, you will need to choose between two plans offered by the Washington State Department of Retirement Systems: PERS 2 and PERS 3.
Washington State law requires that you initially be placed in PERS 2 temporarily when you are initially eligible. If you turn in forms to select PERS 2, you can stay in PERS 2. However if you do not choose between the two plans within 90 days of your initial eligibility, the law requires that you permanently move into PERS 3 with a mandatory 5% contribution rate.
Each January, current PERS 2 members enrolled prior to March 1, 2002 have the option to transfer to PERS 3.
PERS 2 is purely a defined benefit plan. This means that your retirement benefits are pre-defined according to a formula and the extent of your participation. For PERS Plan 2, the defined benefit formula equals 2 % x your service credit (time worked in eligible positions) × your average final compensation.
PERS 3 is a combination plan and includes a reduced defined benefit plan funded by the employer’s contributions and a defined contribution plan funded by the employee’s contributions.
Your retirement benefit for the defined benefit plan will be calculated on a formula that equals 1 % x your service credit × your average final compensation.
The defined contribution plan allows you the opportunity to contribute a pre-defined amount of your pay into investments which you are responsible to direct. Once you establish your contribution amount you can not change it. Your retirement benefit for the defined contribution is based on the amount you contribute and the performance of the investments that you choose. Investment returns (both gains and losses) are credited to your account.
Here is a hypothetical example regarding two PERS participants: one in PERS 2 and the other in PERS 3. Both have the same average final compensation (or AFC: the monthly average of your 60 consecutive highest-paid service credit months) of $2,000 with 30 years of service. In this example, both retire at age 65 (note that earlier retirement options are available).
| EXAMPLE | PERS 2 Participant | PERS 3 Participant |
|---|---|---|
| AFC | $2,000 | $2,000 |
| Service redit Years | 30 | 30 |
| Retirement Age | 65 | 65 |
| Lifetime Monthly Defined Benefit1 | 2% x 2000 x 30 = $1,200 | 1% x 2000 x 30 =$600 |
| Employee Contributions | PERS employee rate can change each year and is currently 4.15% of pay.** | 5% – 15% of pay each year.3 |
**As set by the Legislature each July 1.
People who choose PERS 3 often do so for one of two reasons. First, they may feel that they will not work in a PERS position long enough to qualify for a pension benefit at retirement and they want to have access to their retirement savings when they leave their PERS position. For periods of employment less than five years over your lifetime, this should not be a concern. The money that you contribute to either plan, plus any earnings and less any losses, is always your money. However, if your PERS-eligible employment is greater than five years and you decide to withdraw all of your contributions, if you do so in PERS 3 you may still qualify for a pension benefit at retirement, but if you withdraw your contributions from PERS 2 you forgo any retirement benefit.
Second, they know that choosing PERS 3 means that they have the responsibility to manage their own investment choices and they prefer to do so .
People who choose PERS 2 often do so because they expect their career will include long-term public employment, and they want the security of a defined benefit at retirement, with no concerns about investment risk.
Employees who select PERS 2 may also consider participating in the Voluntary Investment Program (VIP) as a way to partner the security of PERS 2 as a base retirement income with the benefits of investing for retirement. Since contributions to the VIP can be changed, stopped or restarted at any time (rather than remaining fixed at the same level for the duration of your employment, as with PERS plans), VIP participation may allow you more flexibility to respond to changes in your life than you would have as a PERS 3 participant.
Returning to our prior comparison of PERS 2 and PERS 3, now with VIP added, we see:
| AFC | Service Credit Years | Retirement Age | Lifetime Monthly Defined Benefit1 | Contributions | |
|---|---|---|---|---|---|
| PERS 2 Participant | $2,000 | 30 | 65 | 2% x 2000 x 30 = $1,200 | PERS employee rate is currently 4.15% of pay2 |
| PERS 2 Participant plus VIP | $2,000 | 30 | 65 | 2% x 2000 x 30 = $1,200 | PERS employee rate plus any VIP savings from $15 per paycheck up to the IRS maximum4 |
| PERS 3 Participant | $2,000 | 30 | 65 | 1% x 2000 x 30 = $600 | 5% – 15% of pay each year3 |
If the person in PERS 2 has trouble meeting their monthly expenses due to a change in circumstances—such as a reduction in hours, new family member or home, or other unforeseen life event—they could reduce or stop their contributions to the VIP until they were in a position to save again. A person in PERS 3 does not have the ability to suspend, decrease or increase their savings rate.
Visit the plans’ web pages to enroll:
1These calculations result in the standard benefit. This benefit would be lower if the participant chooses to continue benefits to a survivor upon the plan participant’s death. Note that this benefit, while significant, is unlikely to fund your entire income need during retirement. The amount that you save in addition to your PERS plan and the performance of your investments will determine how much you have available to you as a retiree.
2PERS 2 — employee contributions, plus interest as set by the Department of Retirement Systems, are yours if you wish to withdraw them should you become ineligibe to participate If you retire from PERS, these are used to fund your lifetime retirement benefit. If you do not work sufficient time to receive a benefit, you may withdraw your balance, subject to any taxes or penalties, or roll it over into a tax-qualified account.
3PERS 3 — employee contributions, plus any earnings and less any losses, are yours. In combination with a reduced PERS 3 benefit, the employee contribution amount that you elected and the performance of your investments in your plan account will determine how much you have available to you during the 30+ years you can expect to be in retirement.
4VIP — For IRS maximum pre-tax contribution limits see the VIP site. As with PERS, your contributions into the VIP, plus any earnings and less any losses, are yours. In combination with a PERS benefit from either plan, the amount that you save and the performance of your investments in the VIP will determine how much you have available to you during your retirement.
Copyright © 2007 University of Washington
