Answers to questions about the upcoming cash balance retirement benefit for employees hired after FY22
Last spring, the Texas Legislature passed Senate Bill 321 to address the unfunded pension liabilities (or debt) in the Employees Retirement System of Texas (ERS) Retirement Trust Fund and create a new retirement benefit. Since lawmakers began debating the bill, ERS has received many questions about the legislation. With Gov. Abbott’s signature in June, SB 321 is officially law. ERS has begun preparing for the new retirement benefit and we can start answering some of those questions.
1. What are Senate Bill 321 and the cash balance retirement benefit, and how do they affect me?
It’s probably best to say this first: SB 321 and the cash balance retirement benefit don’t change the benefits for any current state employees or those employees hired before September 1, 2022. However, it does have significant value to current employees and retirees because the legislation makes a funding commitment to the ERS pension plan. It will stabilize the ERS plan and put it firmly on a path to actuarial soundness.
The Legislature passed SB 321 to address the long-term financial stability of the ERS retirement plan. There are two major parts to the law:
The first requires the state to make additional annual payments to the Trust Fund, above its regular contributions that currently equal 10% of the state payroll. The goal of the additional payments is to pay off the unfunded liability by 2054.
- The second part of the law calls for ERS to create a cash balance retirement benefit for new employees who start work at state agencies on or after September 1, 2022.
Although the law has no direct effect on retirement benefits for employees hired before September 1, 2022, you will benefit because paying off the unfunded liability will help ensure you—and all employees and retirees—get the lifelong retirement payments you earn over your career.
2. If the state’s additional payments will pay off the unfunded liability, why did the law also create a new retirement benefit?
The new retirement benefit lowers the possibility of future changes to the retirement plan, and continues to provide a competitive guaranteed retirement benefit to state agency employees. The new cash balance benefit structure will help to stabilize the overall ERS retirement plan structure and therefore reduce the chance that the retirement program will run into future funding problems. If lawmakers had not addressed some of the underlying financial risks that contributed to the current unfunded liability, the plan had a greater chance of falling back into an underfunded status.
In 2009 and 2013, the Texas Legislature changed retirement benefits for what were then future employees (starting on/after September 1, 2009 and September 1, 2013, respectively).In 2015, legislators also increased retirement contributions for all employees and the state. The creation of these two additional retirement groups helped reduce future unfunded liability, although they were not enough to fully address existing unfunded liabilities.
The new benefit structure for employees starting at state agencies on or after September 1, 2022 will address some of those issues and better meet the needs of a modern workforce. While stabilizing the plan for the future, the new benefit structure has a lower employee contribution rate and shorter vesting period. Employees in this group also will be able to grow their benefit without active service credit and have the opportunity for automatic annuity increases in retirement.
This will be ERS’ fourth retirement benefit structure. ERS plans to refer to members enrolled in this benefit as being part of "Group 4."
3. Is the Group 4 retirement structure a defined benefit, like the structure for Groups 1, 2 and 3?
Yes. A defined retirement benefit is one that pays retirees a set monthly annuity as long as they live—even if their retirement account runs out of money before they die. (Defined benefit plans are different from defined contribution plans, like 401(k)s, which stop paying benefits when the account runs out of money.)
Group 4 employees will participate in a type of defined benefit called a cash balance benefit. Like the current defined benefit plan, it will provide a guaranteed lifetime annuity to retirees. While the cash balance benefit is new to ERS and state agency employees, other major pension funds in the state have offered it for decades. The Texas Municipal Retirement System (which provides benefits to employees of many Texas cities) and the Texas County and District Retirement System (which provides benefits to employees of 253 of Texas’ counties and certain special districts) both have cash balance benefits as their only defined benefit retirement plan.
4. How will the Group 4 cash balance benefit work?
In the cash balance benefit, active state agency employees will contribute a percentage of their monthly salary to the fund, as current employees do. Each employee’s contributions will be assigned to their account and earn interest at a guaranteed rate each year. Member accounts also will have the ability to earn more annually, in addition to the guaranteed interest rate, through a feature called gain-sharing. With gain-sharing, Group 4 members will earn additional growth in their accounts when ERS’ investment earnings exceed the guaranteed interest rate. But member accounts will never earn less than the guaranteed interest rate, even in years when ERS’ investment returns may not reach the guaranteed rate. This will protect members from the downside of volatile financial markets.
A member’s account will continue to grow by at least the guaranteed interest rate throughout their career, even if they leave state employment. When a member reaches retirement eligibility and decides to retire, the state will make a state matching contribution to their account balance. ERS then calculates a lifetime annuity based on the final total balance in the employee’s account. Regular state service Group 4 members are eligible to retire when their age plus service credit equal 80 (the “Rule of 80”) or when they reach age 65 with at least five years of service credit. Certain law enforcement and custodial officer employees may be able to retire sooner, as in the existing retirement groups.
In years when ERS investment returns allow a gain-share adjustment to Group 4 employees’ accounts, Group 4 retirees will get an annuity increase of the same amount. Group 4 retirees could get an annuity increase of up to 3% each year, but their annuities will not be reduced in poor investment return years.
5. Can I opt in to the Group 4, instead of my current group?
No. Your retirement group is based on when you started working for the state:
Group 1 – Hired before September 1, 2009
- Group 2 – Hired September 1, 2009 – August 31, 2013
- Group 3 – Hired September 1, 2013 – August 31, 2022
- Group 4 – Hired on or after September 1, 2022
Learn the differences in benefits for Groups 1, 2 and 3.
6. Why was legislative action necessary?
The Employees Retirement System of Texas’ retirement plan has an unfunded pension liability of $14.7 billion, and was projected to run out of money during the lifetime of current active and retired employees. Since 2003, the retirement plan’s unfunded liability has been steadily growing. Many factors have contributed to the unfunded liability, including inadequate contribution levels, lower-than-expected investment returns in increasingly volatile markets and retirees’ longer life expectancies.
The additional payment schedule in SB 321 shifts the ERS Trust Fund from running out of money in 40 years to being 100% funded in 33 years.
7. Will law enforcement and custodial officers in Group 4 still contribute to and get an enhanced benefit?
Yes, the new benefit structure has an enhanced benefit for employees who contribute to the Law Enforcement and Custodial Officers (LECO) Supplemental Retirement Fund. Group 4 LECO members will contribute an additional 2% of pay to their supplemental benefit. Group 4 LECO members’ accounts will function the same as regular Group 4 state employee accounts, except the state will match the amount in their supplemental accounts at a higher rate than it matches their regular accounts. As with current LECO members, Group 4 LECO members will have to work in designated LECO positions for at least 20 years to qualify for the enhanced retirement benefit.
8. Did state employee and retiree associations support the bill?
Some employee groups had concerns about what they saw as potential negatives of changing benefits for future state agency employees, including how it might affect the overall state workforce. However, many state employee associations publicly supported the legislation and the positive impact it would have on state retirement funding.
9. Where can I learn more about retirement benefits for state agency employees and issues with the Retirement Trust Fund?
For information on current retirement benefits, start on ERS’ Retirement Benefits for Active Employees page.
For information on the Retirement Trust Fund, read our series of articles from earlier this year: