Understanding the BRS Can Give You a Leg Up
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Historically, 81 percent of members leave the military service with no retirement benefits. None. But the military retirement system is changing. The Department of Defense (DoD) projects that under the new Blended Retirement System (BRS), which goes into effect in January 2018, 85 percent of service members will separate with portable retirement savings—partly because the BRS will automatically enroll into the Thrift Savings Plan (TSP) all new service members.
Everyone in uniform today is grandfathered in the current military retirement system. So why learn about the BRS? Here are two good reasons. First, service members with fewer than twelve years of service on January 1, 2018, may opt into the new BRS—and you'll want to make an informed choice. Second, even if you joined the military before 2006, becoming familiar with the BRS can give you a leg up when it comes to understanding the types of features found in some retirement plans offered in the civilian workforce. This can smooth the transition if (or when) you leave the military and move into the public or private sector.
DoD has been releasing—and plans to continue making available—resources about the BRS and what to consider if you're among those who may choose whether to opt in. Very briefly, the BRS will reduce the pension portion of military retirement of those who opt in and serve for at least twenty years. In addition, if you elect the BRS, your service will contribute to your TSP account an automatic contribution of 1 percent of your basic pay—regardless of whether you otherwise choose to contribute to the TSP. You may also receive a matching contribution (up to an additional 4 percent when you contribute at least 5 percent). That's free money—and it is yours to keep after two years of service.
So, much like employees in the civilian workplace who want to build a retirement nest egg, the service member who opts into BRS assumes greater responsibility and control of their future retirement.
Here are five things to know about civilian workplace retirement systems—including features you'll find in the BRS:
- TSP-like plans have become the norm. Department of Labor statistics show that traditional pensions—known as "defined benefit" (DB) plans—are increasingly rare. Rather than pay retirees a set sum each month—typically based on years of service, ending salary and age at retirement—most private sector companies now offer "defined contribution" (DC) plans. According to American Benefits Council, 89 percent of workers at companies with 500 or more employees have access to an employer-sponsored DC plan. Whether called a 401(k), 403(b) or 457 plan (depending upon the particular provision of the tax code that governing the plan), private sector DC plans are quite similar to the TSP and have become an important way to save for retirement for many Americans.
- You lead the charge. In a DC plan, it's your money funding your retirement account. An increasing number of civilian DC plans automatically sign you up for the plan, like the BRS will do for new service members beginning January 1, 2018. But in those plans, as in the BRS, you control how much of your salary you contribute, up to the annual IRS limits. Many financial advisors encourage their clients to contribute at least enough into retirement accounts each year to receive the full employer match, if offered—which leads to the next point.
- Matches add up. Just as those who opt in to the BRS will now get a match in their TSP accounts, civilian employers may also choose to provide matching contributions based on an employee's personal contributions. Choosing not to contribute to the maximum match is like leaving money on the table.
- You chart your own course. With DC plans, the employee must decide how to allocate their funds among the choices offered by the plan. The allocation decision is important, as the employee bears all of the investment risk in a DC plan. To assist with this decision, many DC plans offer life-cycle, or target-date options, which allocate funds according to a formula based on a specific time horizon, an individual employee's age, stated risk tolerance and other factors. Similarly, the TSP gives service members and others the ability to choose among several life-cycle options (the "L" funds). This allocation is periodically and automatically adjusted as retirement draws nearer. Keep in mind that investments in these types of plans are allocated based on a model set up by the plan administrator, and may not be appropriate for all workers.
- It's your money. New members who join on or after January 1, 2018, will receive automatic contributions after 60 days, and those who serve at least two years may receive DoD matching funds. Current service members who opt in to the BRS do not need to wait 60 days or two years, but will receive automatic contributions and matching funds the first pay period after they opt into BRS. DoD funds contributed into TSP are the service member's to take with them following two years of service. When they separate, they can leave the funds in the TSP or may roll them into a new employer's retirement plan, or into an IRA, giving them a step up in the climb toward retirement. Many civilian employer plans also have vesting periods and may allow individuals to remain in the plan if they switch employers, often depending upon the fund balance.
As service members become familiar with the BRS, they'll get a sense of what they're likely to encounter if they enter the civilian workforce. When and if they decide to make a career transition to the civilian world—the retirement plan side of that world is likely to look pretty familiar.