Recognizing a significant shortcoming in the Florida Retirement System’s Investment Plan, the state legislature recently took substantial action to address the problem by passing House Bill 5007, which was signed by Gov. Ron DeSantis last week.
It is generally recognized that a defined contribution structured retirement plan needs a contribution rate of between 12% and 15% of a worker’s salary (where employees participate in Social Security) to produce an income that is likely to maintain the employee’s standard of living once they are in retirement. For teachers and most other non-safety public workers in Florida, the contribution rate in the Florida Retirement System’s Investment Plan has been 3% by the employees and 3.3% by the employer, for a total of 6.3%. Unfortunately, this is effectively half of the total contribution necessary to effectively fund an appropriate retirement income.
In House Bill 5007, the Florida legislature increased the state’s contribution to the FRS IP by 3% to a total employer contribution of 6.3%. This brings the contribution rate of government employers, i.e. taxpayers, to 6.3% and the total contribution rate up to 9.3%, certainly a substantial improvement. The increase is expected to cost $249 million next year. Ideally, workers would’ve also upped their contributions to FRIS IP, but the state legislature is to be applauded for recognizing this shortcoming and for acting to improve lifetime financial security for state employees. This change might also aid in recruiting and retaining quality employees into state service as taxpayers put more money toward workers’ retirements and the plan better meets employees’ long-term needs.
The FRS IP has been a plan that effectively meets most other best practices for defined contribution plan design. It provides a robust communication and education package for employees and has an appropriate investment menu that includes target-date funds for workers who might be less financially active or sophisticated. There is also a broad selection of distribution options for employees to choose from, including lifetime income options. With all these positive design elements, the insufficient contribution rate has kept the plan from being a truly effective retirement vehicle. While the government’s 3% contribution increase goes a long way toward making the plan more effective, the total contribution rate remains insufficient.
The Florida Retirement System Investment Plan should now examine how it can increase the required employee contribution by 3% to 6%, so the total contribution rate would rise to 12.3%. Legislative action will likely be needed, but increasing the employee contributions would create no additional cost to the state’s taxpayers. This increased contribution from workers would bring the FRS IP contribution total from 9.3% to 12.3%, a rate just above recognized standards so that workers could then expect to have the appropriate amount of money set aside for retirement.
An employee contribution rate of 6% is quite comparable to other states with defined contribution retirement plans and could be an appropriate reciprocal response considering not only the state’s increase in its contribution but also the recent 5.4% across the board increase in salaries for all state employees, with some workers also getting additional raises. If workers express concerns about increasing their contribution rate all at once, state policymakers could examine the possibility of implementing the 3% contribution increase gradually over several years. Again, this would likely need to be spelled out legislatively.
The momentum initiated by the important and laudable state action to increase the government’s contribution rate to the FRS IP should not be lost. But to be a truly effective retirement plan for state employees, and best aid employer workplace objectives, including recruitment and retention of employees, the total contribution rate still needs to rise into the accepted range of 12% to 15%.
With the passage of House Bill 5007, the Florida Retirement System’s Investment Plan is much closer to being a model of effective public retirement plan design. Florida policymakers should now seize the opportunity to take the necessary step — increasing employee contributions to 6%, thereby having a total contribution rate into the plan of over 12%, putting the contribution rate in line with best practices.
Adrian Moore is vice president at Reason Foundation and lives in Sarasota. Richard Hiller is a senior fellow at Reason Foundation and has worked on income-focused retirement plan designs for more than 35 years.