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Today’s post is part 1 of a series on the new Blended Retirement System (BRS). Part 1 will cover the basics of the BRS – what it is, the implementation timeline, and where to go for more information. Part 2 covers who is eligible and the details for the Active and Reserve versions. Part 3 compares the BRS to the current High-36 retirement system and run some sample scenarios to estimate the possible value of the BRS. Finally, in part 4 I go over some frequently asked questions, separate some myths vs facts, and offer my opinions on the BRS.
History of the Blended Retirement System
The National Defense Authorization Act for Fiscal Year 2016 was signed into law on November 25, 2015. It authorized the uniformed services to change the current retirement plan into the Blended Retirement System. The current plan, known as High-36, relies on a cliff vested defined benefit pension. The new plan blends a smaller cliff vested defined benefit pension with government contributions to the member’s Thrift Savings Plan and continuation pay.
Note: “Cliff vesting” is when you don’t qualify for the pension until a certain number of years of service. In the US military, the magic number is 20. Serve 20 years, you qualify for a pension. Serve 19 years 360 days, no pension. There are exceptions (medical retirements, early retirements) but in general, 20 years is the answer.
Key factors of the Blended Retirement System
The BRS has several components.
1. Defined Benefit Portion: Like the current High-36 plan, the BRS includes a defined benefit pension. The BRS defined benefit pension is 20% less than the High-36 pension. Under High-36, members’ pensions are determined by the following formula: 2.5% x number of years served x an average of the highest 36 months of basic pay. Under BRS, the multiplier is 2%, while the rest of the formula remains the same.
IMPORTANT: Apparently people are seeing the multipliers and thinking the BRS is a 10% reduction in pension. They think this because, with a 20-year career, the person under High-36 would get 50% of base pay in retirement (2.5% * 20 years) while the person under BRS would get 40% (2% * 20 years). So they see 50% minus 40% and think it is a 10% difference. THIS IS NOT ACCURATE.
2% is 80% of 2.5% (2/2.5 = .8) and 40% is 80% of 50% (.4/.5 = .8). An easy way to check the math on this is to run the numbers for any career length other than 20 years. For instance, at 25 years the High-36 percentage would be 62.5% (2.5% * 25 years) while the BRS percentage would be 50% (2% * 25 years). See how the difference isn’t 10%, but 62.5% divided by 50% is still 80% (.625/.5 = .8)? Don’t let yourself or your friends be misled by this easy mistake.
2. Defined Contribution Portion: In exchange for a smaller pension, the BRS includes automatic and matching contributions to the Thrift Savings Plan (TSP). This is a HUGE benefit for the majority of service members. Right now, less than 20% of people who serve end up retiring from the military. That means 80+% of our service members currently have no employer contributions to their retirement. Under the BRS, the DOD estimates that 85% of service members will leave with some sort of benefit.
Why not 100%? The automatic TSP contributions start after the member has served 60 days, and matching contributions can begin after 2 years of service. However, in order to “vest” in (qualify to keep) the TSP contributions, the member has to serve a minimum of 2 years honorably. I guess 15% of people don’t make it that far? Is that maybe because Traditional Reservists can take a lot longer to achieve the equivalent of two years Active service? I genuinely have no idea and it isn’t explained in any of the training. If anybody does know, please leave the answer in the comments!
3. Continuation Pay: At the mid-career point, members may qualify to receive a bonus in exchange for agreeing to serve a certain number of years. It looks like the continuation pay will be 2.5 months of basic pay for Active members and 1 month basic pay for Reserve members, but there aren’t a lot of details about this. I’ll keep you posted.
4. The BRS also includes three options for receiving the pension.
- The normal full annuity
- A lump sum payout at retirement plus reduced options for the pension (25% or 50%)
We are also still waiting for more details to be released about the annuity options.
The BRS training includes several unique terms. These are four that you may have questions about. The TSP Implementation Guide linked below has the full list if you are interested in learning more.
Automatic Enrollment: service members who enter military service on or after January 1, 2018 will be automatically enrolled in TSP contributions of 3%. They must actively take steps to end their enrollment if they wish not to contribute to TSP.
Did you know? Depending which study you read, plans with automatic enrollment see participation rates about 15% higher than plans without automatic enrollment.
Automatic Contributions: these contributions, equal to 1% of basic pay each pay period, are contributed to a BRS member’s TSP account by his or her service. There is no cost to the member – this is not from the member’s pay. Upon separation from service, members must meet the TSP two-year vesting requirement in order to keep these contributions and their associated earnings.
Example: If your basic pay is $3000/pay period, under the BRS your service will automatically contribute $30/month (pay period = 1 month) to your TSP. This is independent of whether you make TSP contributions from your paycheck.
Matching Contributions: these are contributions the service makes to the member’s TSP account when BRS members contribute to the TSP. The member is entitled to receive a matching contribution on the first 5% of basic pay he or she contributes to the TSP each pay period. Members receive a 100% match up to 3%, and a 50% match up to 5%. Members are eligible to start receiving matching contributions at the start of their third year of service.
Example: If your basic pay is $3000/pay period and you elect to contribute 3% of basic pay, you would contribute $90/month to the TSP. The government would then match that 3% and also contribute $90/month. Plus, you would still be receiving the automatic contribution. So the total added to your TSP would be $90+$90+$30 = $210 per month!
Mandatory Termination Date: Once you have completed 26 years of service, the government automatic and matching contributions cease.
Wondering about the deadlines for the Blended Retirement System? The DOD has put together a handy-dandy timeline just for this.
The key dates you need to pay attention to, whether it is for yourself or the people you supervise, are January 1, 2018 and December 31, 2018. Between those dates is the opt-in period when eligible members can choose to switch to the BRS. The member will remain permanently in the High-36 if they don’t do anything by December 31, 2018.
Where to go for more information
- Uniformed Services Blended Retirement System page is the main DOD page for the BRS. Here, you can find:
- Online training for individuals, leaders, and financial counselors/educators
- The Leaders Pocket Card
- Infographics for Active and Reserve Components
- (coming soon) A BRS comparison calculator
- Frequently Asked Questions
- And more! It’s a good site. I highly recommend checking it out.
- Financial Counseling. Through your base’s Military and Family Life Counseling Center or Military OneSource , you can receive free financial counseling. These financial counselors are being trained in the BRS but – and this is important – they are forbidden from making a recommendation for you. They are only allowed to present the facts about each plan. The decision is up to you, if you are eligible to switch to BRS.
- Ten Things About The Military’s New Blended Retirement System
- Want to really get into the details? The TSP put out a great implementation guide: Implementation of the Blended Retirement System
That’s all for now. Next week we will delve into the details of who is eligible for the BRS and the details of the plan. (Go to Part 2)