State pension system picks vendors for new savings option
Nearly a year after Pennsylvania lawmakers passed pension reform, the state's pension fund for school employees has selected vendors for the new 401(k)-style elements that will be available next year.
The Public School Employees' Retirement System said Voya Institutional Plan Services, part of Voya Financial Inc., will serve as the third-party administrator for the defined-contribution piece of the new system, created by law last summer.
The reforms will give new public school hires three retirement plan options beginning in July 2019, including a standalone 401(k)-style plan. The other two retirement options will be hybrid plans, which combine a traditional guaranteed pension benefit with defined-contribution elements.
The new system will not impact the pension benefits of current employees and retirees. However, current employees will be able to make a change, if they want, and opt into one of the new retirement options.
Voya would oversee both the new standalone 401(k) plan and the defined-contribution piece of the two hybrid plans.
In addition to Voya, the pension fund, known as PSERS, has selected T. Rowe Price Retirement Blend Target Date Funds as the default investment option for the defined-contribution portion.
Officials said contracts with both vendors are expected to be in place by late summer. Terms were not disclosed due to ongoing negotiations. PSERS said it looked at six submissions for administration and seven for investment options, but declined to release names until a contract is finalized.
The State Employees' Retirement System (SERS) has not yet selected vendors, but is expected to do so within the next few weeks. The reforms impact new hires at SERS in January 2019.
What was passed?
Here is a quick breakdown of the retirement plan options approved for Pennsylvania’s school teachers and state employees under the new pension system:
1. The first hybrid option, which would become the default plan for those who don’t make a choice, would require employees to contribute 8.25 percent of their pay for retirement.
For employees covered by SERS, 5 percent would go to the traditional defined-benefit pension, while 3.25 percent would go to the new defined-contribution, or 401(k)-style component. For employees covered by PSERS, the split is 5.5 percent defined benefit and 2.75 percent defined contribution.
The guaranteed pension would be based on 1.25 percent of an employee’s final average salary multiplied by years of service. The final average salary is based on the five highest years, up from three now. For state workers, there is an overtime cap of 10 percent of base salary.
Once they retire, employees also can also draw from their defined-contribution account earnings.
2. The second hybrid option calls for a 7.5 percent employee contribution, which is split between 4 percent for the traditional pension and 3.5 percent for the defined-contribution portion for employees in SERS. For employees in PSERS, it would be 4.5 percent pension and 3 percent defined contribution.
The guaranteed pension would be tied to a 1 percent multiplier, supplemented by the defined-contribution savings.
3. The standalone 401(k)-style option requires minimum employee contributions of 7.5 percent with no guaranteed pension. The employer contribution would be 3.5 percent for SERS members and 2 percent for PSERS members.