Letting the Garden Grow: PERSI Base Plan Accounts
North End Boise Bounty
If you work as a full-time public employee in Idaho, you likely participate in the Public Employee Retirement System of Idaho, or PERSI. The PERSI handbook, which can be found here, is a good resource for all things PERSI. In this series of blog posts, I will answer specific questions about how PERSI works in plain English.
Today’s topic is about the “Base Plan”, which is PERSI’s pension plan. After you have worked and contributed to the Base Plan, you will see an account balance on your account statement. What does this account balance mean? Can you withdraw and spend it? And if you can, should you? How does it relate to the monthly pension benefit you will receive upon retirement? Will your heirs get it if you die? Those are the questions I will tackle in this post.
Base Plan Basics
The Base Plan is one of PERSI’s two main retirement plans. It is a defined benefit plan, which most of us know as a pension. If you work for long enough, you earn a monthly payment that starts upon your retirement and continues for your life, and, if you choose, the life of your spouse (the spouse’s amount will be less). Your monthly payment depends on how long you work as an Idaho public employee and the highest average salary you earn while working.
PERSI’s other retirement plan is the Choice 401(k) plan, which is an optional plan for retirement saving. It is a defined contribution plan, which means that your account balance is the total amount available to you upon retirement (before taxes and, potentially, early withdrawal penalties). In contrast to the Base Plan, you are not guaranteed any minimum lifetime payment. Your account balance will fluctuate based on how much you contribute and how you invest it. We will cover the Choice plan in more detail in future posts.
What Does Your Base Plan Account Balance Mean?
When we see a dollar figure on an account statement with our name on it, we naturally think that is our money. In the case of the Base Plan, it isn’t that simple. Think of your Base Plan account balance as seeds you have planted that will grow into a productive vegetable-producing garden over time, with the vegetables representing your retirement pension. In certain circumstances, you can pluck the first few initial buds off of the garden’s plants before they are mature and producing vegetables. However, like most things in life, there will be consequences, which can be major.
Setting the garden analogy aside for a moment, the account balance represents the amount of money you have contributed to the Base Plan from your paychecks, plus growth. The balance grows at a rate set each year by a formula that depends how well the managers of the Base Plan invest the money. The growth rate will not be less than 1% per year under current law. As a result, your Base Plan balance should never go down unless you make a withdrawal.
The Base Plan Account balance does not determine the amount of your monthly pension you may receive upon retirement. Your pension is determined by a formula based on your months of service and salary. The amount of your pension also depends on whether you take early or regular retirement and how much of your benefit you chose to have your beneficiary (such as your spouse) receive if you die first. PERSI can provide you an estimate of your monthly pension at any time. Even with an estimate, however, it is good to understand the formulas used to calculate it. Stay tuned for a future post on these formulas.
When Can You Withdraw Your Balance?
Let’s say you are fifteen years in to your career as an Idaho public employee. You peruse your PERSI Base Plan statement and notice that you have a nice five-figure account balance. Can you withdraw that money to help pay for a child’s college or a new deck, for example?
The short answer is no. There are two scenarios where you can withdraw the balance shown on your PERSI Base Plan statement:
You leave your job. If you stop working for an employer that offers PERSI benefits, you can withdraw your balance. You will owe state and federal income tax on the amount you withdraw. Also, you will owe a penalty if you withdraw the amount before age 59 1/2 except in limited circumstances.
You die. If you die, the person you have named as your beneficiary will receive an amount from your Base Plan. The amount depends on whether you are vested when you die:
Not vested at death (for most members, this means you have less than 60 months of service as a PERSI participant): Your beneficiary receives your account balance as a lump sum and will owe taxes.
Vested at death (but not retired): Your beneficiary may elect to receive two times your account balance (if you were a PERSI participant on or after July 1, 1999--the rules were different before that). As an alternative, your surviving spouse has the unique ability to receive a monthly pension instead of the lump sum death benefit. The amount they will receive is based upon your age at death, their age, the number of months you worked and your average salary.
Harvesting Early: Should You Withdraw Your Base Plan Balance if You Leave Your Idaho Job?
In most cases, the answer is no. As mentioned above, you will owe taxes (and, likely, penalties, if you are younger than 59 1/2) if you withdraw your balance. If you are vested, the garden won’t be around to produce any vegetables when you retire: you will lose any future pension benefit. This benefit could be much more valuable than your plan balance after paying taxes. PERSI can provide an estimate of what your future pension benefit would be if you leave your account intact.
Of course, if you don’t have another source of money to fund your living expenses between jobs, you may have to withdraw the money. Try to avoid it, especially if you are vested. For example, you may be better off relying upon credit to fund a temporary gap in employment.
If you are not vested in PERSI when you leave your job, it is reasonable to consider whether you should roll your plan balance into another retirement plan, such as a new employer’s 401(k) plan or an Individual Retirement Account (IRA). Done properly, this will allow you to defer any taxes you would owe upon a withdrawal. Here are some things to consider to help you with this decision:
Do you think you may work for another Idaho public employer in the future? If so, keeping your PERSI balance intact is likely the right choice. You will preserve the retirement credits you have accumulated, which will be added to any future credits you earn at another Idaho public employer.
Do you want more control over your investments? If you leave the funds in PERSI, you are relying upon PERSI’s investment team to make investment decisions. If you roll the money into another retirement account, you will be able to chose your own investments from the options in the new plan.
How much do you value the return “floor” provided by PERSI? Your PERSI balance earns interest at a rate set by PERSI. This rate is calculated as the greater of (1) an amount based on the return on PERSI’s investments in the previous year and (2) 1%. So, if the stock market has a bad year, and PERSI’s return is negative as a result, you will still earn at least 1% in the next year. This feature is valuable and makes the PERSI account less risky than an equivalent investment without it. However, in recent history, PERSI’s investment returns have trailed the benchmarks used by PERSI for comparison. This is likely due in part to the active investment approach taken by most pension funds, including PERSI, which involves paying higher fees than are charged by passively-managed index funds. You may be giving up some upside by keeping your account invested at PERSI.
How much of your total investment portfolio does the PERSI balance represent? If the PERSI Base Plan balance is a small part of your overall portfolio, it may not be worth maintaining your PERSI account as a separate account. Keeping things simple is a valid reason to roll the balance into another one so that you have one less account to pay attention to.
The Bottom Line
The PERSI Base Plan can be a valuable piece of the retirement puzzle for Idaho public employees, even if you don’t spend your entire career in public service. Don’t focus too much on your plan balance. Instead, spend the time to learn the rules of the plan and keep a long-term mindset. This will empower you to make the right decisions to grow a bountiful garden for retirement!