Some soldiers may be sorry down the road for not signing up for the Blended Retirement System during the “opt in” period that concluded on 31 December 2018. The results of the opt-in, a complex decision with difficult choices, will have researchers examining why more troops did not choose the new system. The answers will certainly impact retention and readiness. One question we might ask based on the early data available is whether soldiers missed out on a good deal.
BRS replaces the present High Three system in which individuals must serve twenty years active or equivalent reserve service to qualify for retirement benefits. BRS offers service members a reduced annuity combined with automatic and government matched deposits to the Thrift Savings Plan (TSP) which individuals can invest in a range of low cost investment funds. In addition, soldiers may take a lump sum distribution on retirement of up to 50% of the discounted value of their retirement in exchange for reduced annuity payments until full retirement age. While not part of BRS, the authorizing legislation also created a mid-career Continuation Pay for service members in which they may receive a minimum of 2.5 times monthly pay as a one-time bonus at mid – career (8 – 12 years of service) up to a maximum of 13 months’ pay, with the specific rate set by the needs of the service. BRS clearly offers soldiers more choice.
So did service members miss a good deal if they did not opt for BRS? The answer is dependent on individual circumstances, as is often the case for financial decisions. But a few broad conclusions can focus our thinking and make sure this new system helps retention over time. For service members who know that life will call them out of the military altogether before the twenty year mark, opt in was clearly the better path. Under BRS, The government contributes 1% of the soldier’s basic pay to an individual TSP account and matches individual contributions up to five percent of basic pay. This translates to an immediate 100% return on service member contributions, with the added benefit that those contributions will grow at compounded rates within a chosen TSP fund. Matching contributions vest immediately, and the 1% automatic contribution vests in as little as two years.
If service members knew their intentions to remain in service and completely understood BRS, then opt in rates should have been much higher. Subsequent research will likely reveal that service members allowed uncertainty and “status quo bias” leave them in a state of non-decision and locked into the legacy system. Should they decide to leave service prior to the twenty year mark, they may regret their indecision.
One service had a better opt in rate than others which will likely be of interest to researchers. The Marines made each service member make a positive choice to opt in or remain in the legacy system following the training associated with BRS. The other services left the choice up to individual initiative. The dynamic of having individuals make a positive choice likely brought greater clarity of goals and plans to leave the service short of retirement. Subsequent research will likely show that education, counseling and leadership are key inputs necessary to bring about informed choice. But one clear conclusion is that the new system involves more complex and difficult choices.
For those who know the military is their calling and will likely serve for twenty or more years, the picture involves more complicated choices. For this population the legacy system is often the better choice on a present value basis. To its credit, the DoD provided financial calculators on its BRS website and examples in its eouraged service members to seek counseling as they made decisions, important resourcesducation materials to walk service members through the use of personal factors in making a good decision. As always in financial models, the variables you include and assumptions you make in your model shape the results you generate. The DoD materials also enc as complexity and risk mark the path forward for this population.
A few simple scenarios generated through the DoD calculators demonstrated some broad comparisons. First, I ran an active duty O3 who intended to retire at the twenty year mark and earned due course promotions along the way. I did the same for an active duty E7 who was sure of E8 promotion and transition at the same twenty year mark. Each of our individuals received a 2.5 times basic pay continuation bonus along the way and deposited the proceeds in full to the TSP account. Finally, each of the individuals made the full 5% contribution to earn the full government match and earned a 7% nominal return on their TSP accounts, roughly in line with the results they could expect from a broad common stock fund based on the S&P 500 or the C Fund. I figured each of the individuals would live to ninety, not an uncommon expectation given life expectancy trends.
Briefly stated, the annuity portion of the BRS turns out to be about 20% less than the comparable present value of the annuity it replaces under High Three. Given the assumptions above, the legacy High Three system turned out to be about $300,000 more valuable to the notional Captain and about $150,000 more valuable to the Sergeant First Class. Our example service members were able to make up the difference by taking more risk in their investment portfolio, at an assumed investment return of 8.35% to be exact. Returns in this range require a heavier weighting into more risky assets such as small or international stocks found in TSP’s S or I funds. A more robust continuation pay invested in TSP would close some but not all of the reduced annuity value. With the size of continuation pay contingent on retention conditions at the time, service members can’t predict what the number will be in advance. The findings are in line with most 401K arrangements in corporations. Mixed defined benefit and defined contribution plans achieve savings to the corporation in the annuity portion and give more choice to the individual. At the same time they shift risk and choice onto the individual in order to make up the haircut to the annuity provided by a defined benefit at retirement.
BRS is now the system of record, and with it come a host of choices that service members must make. Unanswered questions include whether the combination of choice, continuation pay and a reduced annuity will retain soldiers over the long term. The system was built on extensive research, so the pieces are in place to make good evaluations. What the experience of the open season does tell us is that managing your finances in the military – an already complicated endeavor – has entered a new age of complexity in which individuals will be much more responsible for their choices. Service members will have to educate themselves and find good advice from professional who approach the question from an angle of considering the best outcome for the soldier. A new age of choice, opportunity and complexity is upon us.
COL (ret) Mark Troutman, PhD, CFP® is a 28 year army veteran and educator who writes on national security and financial planning for the military community. You may contact him at firstname.lastname@example.org. Mr Kirk Taylor, CFP® contributed to this article. You may contact him at email@example.com.
The opinions expressed in this article are those of the author and do not reflect the CA Association, DoD policy or those of any corporation.