Since before World War I, the United States has maintained a retirement program in one form or another to incentivize military servicemembers to build long-term careers in the armed services. The last iteration of the military defined benefit retirement system, called the High-36 Retirement Plan (or “High-3”), was established after World War II and required servicemembers to serve at least 20 years before becoming eligible for retirement benefits. The High-3 system calculates retirement pay based on a percentage of the average salary from the highest 36 months (or 3 years, thus the name “High-3”), for those who have met the 20-year service requirement.
In this guest post, Kathleen Boyd points out that this requirement has been problematic, as according to the Department of Defense, an estimated 80 percent of military personnel exit their service before 20 years. Consequently, most servicemembers have departed the military without any retirement savings. To compensate for the all-or-nothing cliff vesting, the military began offering a Thrift Savings Plan (TSP) so that servicemembers could supplement their retirement benefits with their own tax-preferenced savings. However, the TSP under the original High-3 system offers no military contributions or matching elements on behalf of servicemembers; it’s ‘just’ a self-directed retirement savings plan. And consequently, it provided little to no incentive for a servicemember to initiate contributions if they weren’t already self-motivated to do so.
In 2016, Congress enacted substantial changes to the High-3 military retirement system for the first time since it was set up in 1981. The National Defense Authorization Act (NDAA), effective January 1, 2018, was created with the goal of cutting expenses while increasing flexibility for servicemembers to participate and get at least some retirement benefits from the government. From that legislation, the new Blended Retirement System (BRS) was born.
The BRS consists of a blend of a new High-3 system, similar to the old but updated with a decreased defined benefit amount (due to an adjustment of the years-of-service multiplier), plus new provisions for servicemember TSP contributions (to supplement the reduced High-3 defined benefit amount), including a 1% service automatic contribution (‘free money’ that does not depend on the member’s contribution level) and an employer match of up to 4%. Additional benefits of the new BRS system include substantially increased contribution limits for servicemembers working in combat zones, and a potentially significant retention bonus.
Notably, while the 20-year service requirement still remains in place to receive the High-3 pension annuity benefit under the BRS, a servicemember can take the TSP funds (including their own contributions, government contributions, and matches) upon exiting the military (assuming they meet the vesting requirements – matching contributions vest immediately, and the 1% service automatic contributions vest after two years of service).
To facilitate the transition from the old High-3 to the new Blended Retirement System, the Department of Defense established a deadline of December 31st, 2018 for active servicemembers to make a decision on whether to opt into the new system or stay with the old. Yet even though the deadline for the choice has passed, it’s still important for advisors working with military clients to understand the benefits and risks of this irreversible decision for future planning purposes.
For example, if a servicemember opted into the new plan, they are now set to receive a lower defined benefit amount, but also have access to government contributions and a matching benefit to their TSP. Alternatively, if a servicemember chose to stick with the old High-3 plan, they stay on track to receive the higher defined benefit amount but lose out on government contributions and matches to their TSP.
The key point is simply that there are additional intricacies of the new system that advisors who serve servicemembers of the military need to understand, and that the servicemember’s join date and years of service will dictate not only which plan will apply to them, but also which benefits they will be eligible for. And while the 2018 deadline to choose retirement systems has passed, the decision must still be made by any Reserve members who are redeployed who have yet to make a choice.