One of my responsibilities over the years has been assisting some employers in joining the LAGERS system. The more of these employers I speak with, the more I have found there are some common misconceptions about the joining process. So, I thought I would clear up some of these common misunderstandings.
- Misconception: Employers Must Cover 100% of Prior Service. Prior service is the time an employee has worked for a subdivision prior to the entity joining LAGERS. When an employer joins the LAGERS system, they do have the option to cover all of the employees’ prior service. However, they also have the option to cover 75%, 50%, or 25% of prior service. Also, if the employer has a plan that is similar in purpose to LAGERS, they will not be able to cover that prior service because it was covered by the previous plan.
- Misconception: Employers Must Pay Unfunded Liability Before Joining. Before an employer can join the LAGERS system, they must get an initial cost study completed that will show the cost of all of the available benefit programs. Included in this cost study is the unfunded liability for covering the prior service of the employer’s current employees for all of the available benefit levels. Sometimes, employers misinterpret this section as being the amount that must be paid upfront when the employer joins LAGERS. However, it is just a disclosure of the liability that will be undertaken by the employer if they join. Instead, the unfunded liability is amortized over a 30 year closed period and paid for through the employer’s monthly contributions. If an employer would like to pay the liability when joining, they can do so, and it will lessen their monthly contributions.
- Misconception: If an Employer Has LAGERS, They Can’t Have a Defined Contribution Account. Many of the employers who are looking into LAGERS are looking at making the shift from their defined contribution investment plan to LAGERS’ defined benefit plan. They believe they can only exclusively have LAGERS or a defined contribution account plan. In fact, LAGERS employers can have both LAGERS coverage and a defined contribution plan.
Historically, when defined contribution plans were created, they were intended to supplement an employee’s pension and Social Security income. So, this may be the best set-up for an employer to provide both a defined benefit plan through LAGERS and a defined contribution plan. This will give an employee the ability to ensure they can meet their secure retirement goals.
These common misunderstandings may have negative impact on an employer joining the LAGERS system. So, I thought I would address these here to help those employers who may be thinking about joining LAGERS. This is all in an effort to continue to give Missouri’s local government employees a secure and dignified retirement.
Is your employer looking into LAGERS? Please feel free to contact us!