Workers weighing 'hybrid' pension
By Greg Wiles
Advertiser Staff Writer
By Greg Wiles
About 45,000 state and county workers must decide by March 31 if they want to join a new pension plan that pays higher benefits but requires workers to contribute 6 percent of future paychecks.
The Employees' Retirement System began informing government workers in November about the new "hybrid" pension plan. So far less than 13,000 of the 58,000 eligible civil servants in Hawai'i have made a decision. About 80 percent of those have switched to the hybrid program, which can tack hundreds of dollars on to monthly pensions.
As it stands now, most state and county workers don't contribute to their pensions under a plan introduced almost 22 years ago. Many of them are hesitant to cut their take home to get a higher pension later in life.
"A lot of people aren't too sure," said Roy Bien, a state Department of Education clerk who said many of his co-workers are still trying to decide which plan is most advantageous. Bien, 53, said he's read through material sent by the pension system but "it's still kind of blurry."
Those who don't inform the ERS of their decision will remain in their current plans, said Wesley Machida, ERS assistant administrator.
The new plan, mandated by the state legislature, will take its place alongside two existing programs, each of which has advantages and disadvantages when compared with the new hybrid plan.
For participants of the ERS' largest plan, the program under which employees don't contribute anything, the hybrid plan will produce larger pension benefits because a formula used to compute payments has been changed to take into account worker contributions.
The Employees' Retirement System, which manages state and county pensions, began an informational campaign for employees last year, mailing out personalized materials on options and plan details. It also made 140 presentations to 15,000 people and opened up a Web site.
The plan is known as a hybrid because it is a mix of state and employee contributions to a retirement account. It has been designed by actuaries so it doesn't add to the ERS or taxpayers expense.
On its face, the new plan is attractive to many folks who can afford it because monthly retirement benefits will be higher.
But there are many variables employees must contemplate in choosing a plan, said Martin Arinaga, a Mililani-based financial planner. That includes making guesses about how long they will live, how much they'll need for retirement, inflation, their income when they quit, and how much retirement income they expect to get from other sources.
"The more you know about it, the more complicated it gets," said Arinaga, who expects a rush of business in coming weeks as clients sort through their options.
"Once you choose the system you want it's irrevocable," said Arinaga. "That's it." He said for people without other savings, insurance or other retirement plans in place the hybrid plan is a good option.
For example, a worker who is 32 years old, has worked for the state for 10 years and plans on retiring in 20 years does better in meeting retirement goals with the hybrid plan.
Assuming the worker makes $42,000 annually, or $3,500 a month, the state would take out $210 before tax each month for a pension contribution.
If the worker retires with $48,000 average annual (or $4,000 monthly) pay for purposes of computing benefits, the pension would be about $2,100 a month.
If the worker stays within the noncontributory plan, the payout would be $1,500 a month.
Experts recommend that people aim for retirement benefits that equal 70 percent or more of their income if they want to live comfortably.
In the above example, this would equate to $2,800 or more a month.
BENEFITS OF HYBRID PLAN
The ERS payments would leave the worker about $700 shy of meeting this goal under the hybrid plan or $1,300 in the hole under the noncontributory option.
Meeting the remainder of the $2,800 could be made up through a variety of means, including Social Security. The average retired worker got about $1,004 a month in Social Security last month.
There are other differences as well that favor the hybrid plan, including higher early retirement payments compared with the noncontributory program.
David Shimabukuro, ERS administrator, said the hybrid may also be a better deal for people thinking they'd like to take the 6 percent of income and invest it on their own.
He said the ERS' actuarial consultant estimated a worker would need to get an annual rate of return between 7.5 percent and 13 percent to equal what the hybrid plan offers depending on the employee's life expectancy and years of service.
The ERS' payouts are also made for life, while someone who chooses to invest in a defined contribution plan such as a Roth IRA would have a limit amount that can be paid out, Shimabukuro said.
The hybrid offering is the first new plan from the Hawai'i Employees' Retirement System since 1984. It will go into effect July 1.
Reach Greg Wiles at email@example.com.