The ORP is a defined contribution plan. A defined contribution plan provides retirement income that, for the most part, is based on your personal account balance at the time of retirement. While the amount of contributions is prescribed by the plan, the amount of retirement income is not.
In this type of plan, you bear the investment risk. You are responsible for selecting investments for your account from those made available by your Provider.
Under a defined contribution plan like the ORP, your retirement benefits are based mostly on the account balance at the time of your retirement. The account balance reflects the amount of employer and employee contributions plus the investment earnings and interest on these contributions.
Strong investment performance can help your account grow, providing large benefits at retirement. Conversely, poor investments can mean little growth in your account, and modest benefits at retirement.
Under the ORP, you must make two important decisions:
Vesting: You are immediately vested in your ORP account. “Vesting” means ownership of the funds in your account. When you terminate employment, no money reverts to the Commonwealth.
Termination prior to retirement: While contributions stop when you terminate employment with the Commonwealth, your account balance remains invested and can continue growing until you are ready to draw your benefits.
The MSERS is a defined benefit plan. A defined benefit plan provides predictable and guaranteed retirement income. In this type of plan, the employer bears the investment risk. The Commonwealth is responsible for ensuring that adequate funds are available to pay the benefit that has been promised to you at retirement.
Under a defined benefit plan like the MSERS, the benefit you receive at retirement is predictable. This is because your benefits are determined by a formula that reflects the average of your highest three years' pay, your age, your years of service, and your group classification. Hence the term: defined benefit.
A fixed income is then paid to you during your lifetime. Your benefits are based on two components: your “annuity savings fund” and the pension paid by the Commonwealth. Your annuity contributions and the state’s funding are invested by professional asset managers that are hired by the Commonwealth. The success of these investments does not affect the amount of your benefit under the MSERS.
Vesting: You become vested in your MSERS benefits after completing ten years of creditable service. Vesting means your entitlement to employer-funded retirement benefits payable under the plan.
Termination prior to retirement: If you are vested, your MSERS benefits are frozen at the time of your termination (e.g., your salary and years of service at the time you terminate).
If you are not vested, your service under MSERS may be applicable to other state and municipal defined benefit plans in the Commonwealth. Your contributions to the plan may be withdrawn and rolled over to another plan.
Both plans require the same employee contribution. For participants employed on or after July 1, 1996, the employee plan contribution is:
9% of your annual regular salary up to $30,000, plus
11% of your annual regular salary above $30,000
Your contributions under both plans are tax-deferred (for federal income tax purposes) using the “Employer Pick-up,” which is described in Internal Revenue Code Section 414(h).
Clearly, your choice of pension coverage can affect your plans for retirement. To help you make this decision, you may also wish to review a brief comparison of ORP and MSERS features, as well as Frequently Asked Questions about both plans.