Frequently Asked Questions - Hybrid Plans

FAQs – Hybrid Defined Benefit/Defined Contribution plan

Hybrid Defined Contribution/Defined Benefit plan
Maintaining a singular defined benefit system is no longer sustainable and provides little incentive to younger employees and those with less than ten years of service. Moving to a combined defined benefit and defined contribution plan treats all employees fairly and spreads the market risk of the system across both taxpayers and employees. Going forward, employees and teachers will pay a smaller amount of their paychecks into the defined benefit system, and will also contribute into their own retirement accounts.

The design of the Defined Contribution (DC) program is under development by the State Investment Commission (SIC). In the coming months a defined contribution service provider will be chosen through a Request for Proposals (RFP) process conducted by the SIC. The goals of the DC program are to provide low cost and secure investment products, efficient plan administration and member education and communication programs.

Question: I’m a teacher and I pay into Social Security.  How will the hybrid plan work for me?
Answer: Under the law enacted November 18, 2011, teachers who pay into social security would pay a total of 8.75 percent of their paycheck toward their retirement, a .75 percent decrease from the 9.5 percent that all teachers currently pay. You would contribute 3.75 percent of pay toward the defined benefit pension plan and 5 percent toward a personal retirement account in a defined contribution plan.  The state will contribute an additional 1 percent to your personal retirement account. 

Question: I’m a teacher and I do not pay into Social Security.  How will the hybrid plan work for me?
Answer: Teachers who do not pay into Social Security will contribute 3.75 percent of their paycheck toward their defined benefit pension plan.  Teachers will contribute 5 percent plus an additional 2 percent toward their defined contribution plan.  The state will contribute 3 percent to the defined contribution plan.

Question: As a teacher who does not pay into Social Security, will I pay more toward my retirement under the new law?
Answer: Yes, 1.25 percent more. Currently, a teacher with no Social Security pays 9.5 percent of pay toward retirement.  Under RIRSA, a teacher without Social Security will contribute 10.75 percent of pay toward retirement.

Question: I have 12 years in the system.  Is there any provision to protect the benefits I have accrued?
Answer: Yes.  Any benefit you have earned as of June 30, 2012 will remain yours and will not be affected.

Question: I’m a state employee.  How will the hybrid plan work for me? How much can I expect to pay?
Answer: A state employee will continue to contribute 8.75 percent out of each paycheck toward their retirement.  State employees will contribute 3.75 percent of pay toward the defined benefit pension plan and five percent of pay into a defined contribution personal retirement account.  The state will contribute an additional one percent to this defined contribution personal account. 

Question: Are there new vesting requirements for employees?
Answer: Yes. Under RIRSA, the vesting period for an employee’s defined benefit pension plan has been reduced from ten years to five years of contributing service.  The vesting period for employer contributions to the defined contribution plan is three years.  Employee contributions to the defined contribution plan, plus earnings, are immediately vested and non-forfeitable.   

Question: How can I trust I will have enough money set aside for retirement under this hybrid system?
Answer: The combination of these two structures is designed to provide employees with more than 70 percent of their average pay in retirement — a similar benefit level to what they receive in the current system.  View details on income replacement from the actuary's presentation to the House Finance Committee.

Question: Will my defined benefit accrual rate change under the new law?
Answer: Yes, your benefit accrual rate will change for service on and after July 1, 2012.  Your benefit accruals earned as of June 30, 2012 are protected under the new law.  For each year of service after July 1, 2012, you will receive an additional benefit accrual of one percent.  Your total benefit accruals are multiplied by the average of your highest five years of compensation to determine your retirement allowance. 

Question: Why not have switched completely to a defined contribution plan and eliminated the defined benefit pension plan?
Answer: A hybrid plan balances the interests of all stakeholders while a transition to a complete defined contribution plan would be costly.  A hybrid system continues a defined benefit plan that shelters employees from excessive stock market risk, but also adds a defined contribution plan that protects taxpayers from shouldering the entire burden of today’s volatile financial markets. 

Question: How much would it cost to transition completely to a defined contribution plan?
Answer: Transitioning completely to a defined contribution plan would cost $882 million in additional contributions over the next five years.  A hybrid plan avoids these additional costs and provides a retirement system that is fair to both employees and taxpayers.