BRS Decision Should Consider the Whole Story
I’ve been following the articles on the new Blended Retirement System with great interest. I have also read the Defense Department’s online information about the new plan and completed all of the BRS education programs. While technically correct, I find some of the information presented about the BRS to be a bit misleading. As a professional financial specialist, both as a past investment adviser and now in my education and counseling role, here are a few additional points service members and their families should consider.
The BRS educational materials should describe the current retirement program as a combination of the Thrift Savings Plan and a retirement-pay benefit. Disappointingly absent from comparisons is the current TSP. That’s because DoD does not consider the TSP to be a benefit since there is no DoD contribution. It’s a valid point since “benefits” are employer-provided.
If that’s the case though, why are member contributions and projected investment results included in the BRS materials? Service members contributing their own pay into a retirement account is not a benefit. Neither are investment results.
If member contributions and projected investment results count as part of the BRS benefit, then those same factors should apply to current TSP contributions. This would give troops an apples-to-apples comparison.
Regarding member contributions, the Employee Benefit Research Institute indicates only 54 percent of people with employer-sponsored retirement plans take advantage of the benefit. The uniformed services’ rate for the current TSP is only 46 percent. The Congressional Budget Office expects the TSP participation rate for the military services to climb with the new match and automatic enrollment. However, as with the national averages, the lowest participation will most likely be among the youngest service members since they have the least discretionary income.
Financial Engines, a leader in the retirement plan business, indicates that a quarter of employees do not contribute enough to their companies’ retirement plans to receive their employers’ full matches. However, forty-two percent of employees with incomes less than $40,000 per year and about a third of employees under 30 don’t contribute enough to receive a full company match.
If you count investment results in the BRS materials, what about projections for members who lose value in their accounts due to market forces and bad investor behavior?
According to DALBAR, a financial analytical firm, the 10-year average annual return for investors in equity funds is 4.2 percent. The same period for the S&P500 index (TSP C Fund) was 7.3 percent. The 30-year average for investors drops to 3.7 percent, while the S&P500 jumps to 10.4 percent. Lower investor results are primarily due to lack of knowledge and bad investor behaviors when managing retirement accounts.
According to the Government Accountability Office, 55-64 year olds average $104,000 in retirement accounts. That’s nowhere near the amount needed for financing 40 years of unemployment during retirement. Chalk it up to lack of participation and investor behavior.
The 85 percent of troops who separate early (the ones officials claim to benefit with the BRS) are among the population least likely to contribute to a TSP and won’t be eligible to receive DOD matching contributions until their third year of service. Officials say separating troops currently leave the service with nothing. Although they do get the post-9/11 GI Bill, and that’s not peanuts.
Point being, service members should be mindful of illustrations that count on full-member contributions and ideal investment results. Life happens and markets fluctuate.
When making the difficult decision about whether to switch to the BRS, keep in mind the conflicts of interest regarding the BRS: the government stands to save a significant amount with the BRS and, financial service firms can’t wait to guide members’ seeking investment advice into expensive investment products. Tread lightly.