Military’s New Blended Retirement System has Options Worth Exploring

A new military pension plan — called the Blended Retirement System — will take effect on Jan. 1, 2018. It’s the first major change to military retirement since World War II, so predictable questions have emerged from the ranks of service members: Am I affected? And tell me again why is this being done?

Here’s one reason:

Even if you never served in the military, chances are you know a veteran who is collecting an attractive pension after putting in at least 20 years of active service. Sometimes, veterans can double up on that pension by starting a second career. That wisely planned cash flow puts them on especially firm financial ground before heading into retirement.

Sounds like a great deal, right?

But what about people who leave the military, whether by preference or other life circumstance, before it becomes a career commitment? Did you know that 81% of all people who enter the military never receive a service-related pension? If you stay less than 20 years, you get nothing.

Change is coming.

The Blended Retirement System features the flexible elements of a civilian’s 401(k) program, including the portable rewards that appeal to the career-flexible millennial generation. It also offers financial incentive for service members to strongly consider a long-term military career.

All told, some 85% of members will qualify for some form of a retirement benefit with two years or more of service.

The Department of Defense has instituted online training, a comprehensive resource web site, along with a social media engagement campaign.

Blended Retirement System Not for Everyone

Now for the fine print.

On the surface, the BRS is a cutback. Fundamentally, new service members will not make as much as they would have in the old system. Those are the black-and-white numbers and there’s no way around them, but it’s estimated the BRS will mean an annual savings of about $2-billion to taxpayers.

“Yes, we’re cutting military retirement benefits,’’ said Michael Meese, a retired Brigadier General who is now Chief Operating Officer of the American Armed Forces Mutual Aid Association (AAFMAA), which provides financial services for U.S. service members and their families.

“But we’re doing so in a way where there’s a plan to hopefully make up for that by people investing in the 401(k)-type element. If that is managed in the right way, there’s the potential to make even more than the old system.

“In speaking to broader, non-military audiences, I’d point out this is a very responsible action and perhaps one that ought to be applied to other aspects of government entitlements, when you consider the deficits we have.’’

Individuals Must Opt-In to BRS

The new plan puts decision-making responsibility on the individual. It’s not just a by-rote system, based strictly on service time, that resembles a worker who simply stays with the same company throughout their career.

Top rewards go to people who exercise financial savvy and discipline through a voluntary Thrift Savings Plan (TSP), similar to the 401(k) programs at civilian companies. By capitalizing on the concept of early retirement savings and the power of compound interest, the plan’s payoff can be maximized.

The BRS is mandatory for those who join the military in 2018 and beyond. Current service members are grandfathered under the old plan, but those with less than 12 years of service can choose the new plan.

The Department of Defense said about 2.2-million military personnel can opt-in to the new system in 2018. It will beneficial to many, but not everyone.

The bottom line for its existence: In the long term, it should mean big financial savings for the federal government. Also, it’s simply keeping with the times in a diverse work force.

“The legacy retirement system was a significant incentive in retaining a career military force and has served (the nation) well for decades,’’ said Lieutenant Colonel Paul Haverstick, a Department of Defense spokesman. “However, 81% of service members leave before reaching 20 years of service and thus receive no government benefit. “This put the services at a disadvantage compared to private sector businesses that provide 401(k)-style portable retirement benefits to their employees.

“The new plan provides portability and additional options to service members, which will help to attract and manage a military force that requires ever-increasing diverse and technical skills.’’

Why Change Now?

The Department of Defense has approached changing things in layers. In 2016, it created awareness about the BRS. In 2017, it instituted educational programs. In 2018, the emphasis will shift to helping service members make a decision about their retirement plan.

This page will explain the BRS and how it came about. It will also detail the existing system — due to expire for new enrollees on Dec. 31, 2017 — because it remains relevant to the military population that stays with that option.

History Behind Blended Retirement System

The BRS was based on a recommendation by the Military Retirement Modernization Commission, which conducted a long-term study of the military retirement benefit.

Its recommendation to Congress was included in the National Defense Authorization Act of 2016 and becomes effective on Jan. 1, 2018.

It’s actually the latest in a series of changes, updates or revisions to the military retirement benefit.

Overall, the current setup is a “defined retirement system.’’ Simply, a set retirement benefit is paid based on the number of years served (20 or greater) in active duty.

There are three phases:

• Final Pay — Members who entered service prior to September 1980 are eligible. Retirement pay is your final base pay times 2.5% for every year of active duty, but you must serve 20 years. That means the benefit is 50% of final base pay if you retire at 20 years and 75% if you retire at 30 years.
• High-3 — Members who entered service between September 1980 and August 1986 are eligible. Retirement pay is the average of your highest 36 months (three years) of base pay times 2.5% for every year of active duty. That means the benefit is 50% of the average of your highest three years of base pay if you retire at 20 years and 75% if you retire at 30 years.
• Redux — Members who entered service after August 1986 are eligible, but could also opt for High-3. The option that distinguishes Redux is the Career Status Bonus (CSB), which pays a $30,000 lump-sum bonus at the 15th year of active service. But there’s a huge tradeoff. Taking that CSB option reduces the retirement benefit to 40% of the average of your highest three years of base pay if you retire at 20 years. Retirement at 30 years would raise the benefit to 75% (same as the High-3 plan).

The evolution of military retirement plans, not surprisingly, was motivated by money.

When it was instituted in 1980, the High-3 plan represented savings over the Final Pay plan. Looking to slash even more money, the Reagan Administration introduced the Redux plan in 1986.

By 1999, though, military officials worried that reduced benefits would create retention and morale problems. So, members were shifted back to the High-3 plan — with a slight twist.

If the careerists agreed on a return to Redux, they received a $30,000 payment entering their 15th year of service. Under that agreement, members received 2% of their base pay for each of the first 20 years of service (totaling 40%). The period from years 20 to 30 of service is worth 3.5%, so retirement at 30 years means 75% of base pay, the same rate as High-3 offers.

None of this addressed the non-career service members who put in less time and had no retirement benefit to show for their time. Service members wanted that flexibility — and now they will have it with the BRS.

Understanding the Blended Retirement System

The BRS has three main components:

• Defined Benefit — The retirement benefit will be a flat 2% times the number of years of service. So, retirement at 20 years will mean 40% of your final base pay (less than the 50% of High-3). If you retire at 30 years, the benefit will be just 60% of your final base pay (less than the 75% of High-3). The retirement benefit can be paid in several forms, including a constant pension payment; a lump sum, then smaller pension until full Social Security retirement, then full amount; or larger lump sum, then no payment until full Social Security retirement.
• Defined Contribution — Here’s the big difference. Through your TSP (Thrift Savings Plan), the military will contribute 1% of your base pay while also matching up to 5% of your contribution — yes, free money! — and you are vested in TSP after two years of service. After two years, you could walk away, fully vested with the government match, while rolling the entire amount into another plan. If you fall short of a career — leaving the military before completing 20 years — the TSP is still yours to keep. The military TSP has been around since 2001, but the government match makes it especially appealing. Twenty years of service — along with a maxed-out government match — could mean hundreds of thousands of dollars. The Department of Defense said a 401(k)-like financial element is especially attractive to civilians with cyber and medical responsibilities that might be added to the forces in a readiness situation.
• Continuation Pay — Think of it as a retention bonus that might be offered in any business. At 12 years of service, active duty members who commit to four additional years will receive a bonus equal to anywhere from 2.5 months to 13 months of base pay (a half-month’s pay is offered to remain in the Reserves).

“I think we will still be able to retain good people,’’ Meese said. “In my view, military service is a great place to serve and there are many service incentives that are not necessarily financial incentives. But this gives an additional tool for people who are on the margins.

“It might be the factor that influences them to stay in the service. If that’s the case, that’s why this is really important.’’

Meese said there will be blanket negotiations for the months of base pay offered with each facet of the military.

“Let’s say Air Force pilots, in order to keep them from jumping to the airlines, will all be offered seven or eight months of their base pay through this bonus,’’ Meese said. “With infantrymen, where there’s less competition (for their skills), it may be smaller. For the people working in cyber fields, I’d say it’s probably the maximum of 13 months because that’s a very competitive field.’’

Retention has been a priority and Haverstick said the Department of Defense believes the BRS will contribute to stability within the forces.

“The Blended Retirement System is truly a blended system,’’ Haverstick said. “The BRS still remains predominantly a defined benefit retirement plan, which will continue to be a significant incentive in retaining a career military force.

“However, modernizing the current retirement system into a blended system, (by) adding a 401(k)-type defined contribution plan, will ensure that the vast majority of … service members receive a portable government retirement benefit. The new aspect of the retirement system will help make the services a more attractive option for those who would like to serve their country, but not plan to stay 20 years.’’

BRS: Pros and Cons

Maj. Patrick J. Bell and Maj. Evan R. Davies, both active duty assistant professors of economics at the U.S. Military Academy at West Point, N.Y., wrote an explanatory paper on features of the BRS.

“No two people are the same,’’ they wrote. “The solution that is right for you may not be the same for your subordinates because of different priorities and appetites for risk. We will help to explain … but in the end, only you can decide which retirement plan is in your best interest.’’

For service members who have a choice, a universal recommendation seems to apply.

If you KNOW you’re going to make the military a career, putting in at least 20 years of service, you’re better off with the existing plan.

If you are UNCERTAIN about your plans or likely to just do a few years of service, you’re better off with the new plan.

“My barometer is try to make a decision where you will avoid a mistake,’’ Meese said. “The best way to illustrate that is let’s say you’re absolutely sure you’re going to stay (in the military), so you remain in the existing plan. But at 16 years, you get passed over for a promotion. Or your spouse decides they can’t do it anymore. Or you can’t do it anymore and want to leave. You leave at 16 years and you have absolutely nothing in terms of retirement from the military.

“Another example. You’re eight years in and you have a choice, but you’re not sure (about staying). You opt into the blended system. You have a great time. You love the military, so you stay in. You’re putting in 5% (to the TSP) and it’s being matched. When you retire at 20 years, you’ll have a 40% (of base pay) retirement. Dollar for dollar, you might have been better off staying with the old system at 50% of base pay.

“Still, a 40% retirement is twice what other federal workers get. It’s still a pretty good pension. It’s less than what you would’ve done had you known the future early, but it’s still not bad. So, I think the general approach should be to maximize the downside and opt into the (BRS) system if you’re unsure. Even if circumstances change, you’re still in pretty good shape.’’

Reese said another BRS benefit is what he expects to be a substantial uptick in financial literacy for military personnel.

“There will be a robust financial education campaign,’’ Meese said. “We think it will help in areas like a 20-year-old soldier realizing he should be choosing more aggressive options instead of a stable value fund.

“More service members will be interested in finance. Let’s face it, when you have a government pension (coming) and you’re working really hard in the military, you don’t have a lot of time for investing on the side. But everyone will have money in the TSP — a pretty good place for the money to be — and there’s (the potential for) a diversified portfolio. You’re not going to be sitting there day trading or looking at it every single day. But you’re going to check on it. You’re going to talk with your friends about it. You’re going to follow it closely. That can only be positive.’’

The Department of Defense’s Office of Financial Readiness provides financial literacy skills at different “touchpoints’’ in a service member’s career, including initial entry into the military, major life changes (marriage, birth of a child), promotions and upon military separation. Service members typically are able to meet with financial readiness managers or counselors during those milestones.

The Existing Plan

For service members who are locked into the existing plan or are choosing to stay with it — either the High-3 or Redux — there’s an important consideration.

Remember, High-3 pays a benefit equal to 50% of base pay (after 20 years of service), while Redux offers only 40%. Why would anyone choose Redux?

There’s an incentive.

It’s attractive in the short term.

But it doesn’t pay in the long term.

In exchange for shifting your plan from High-3 to Redux, the military offers a $30,000 cash bonus for anyone entering their 15th year.

Wouldn’t we all like an extra $22,000? (That’s the bonus’ estimated payoff, after taxes, although there are installment options available to decrease the tax bite. It’s tax-exempt if the service member accepts it while serving in a combat zone).

You could make a nice down payment on a home.

You could start a business.

You could pay off debt.

But according to many estimates, people who shift from High-3 to Redux in order to get the bonus could be costing themselves more than $300,000 in the lifetime value of their retirement.

Congress came up with the bonus plan, borrowing from an incentive that was used in the post-Cold War military slowdown. The Department of Defense produced a web site that explained the features and the vast differences in lifetime benefits.

Still, the bonus has been an effective lure. Even for financially savvy service members who take the bonus with intentions of investing it (for supposed higher returns), there are staggering odds.

“It’s like anything else when you’re talking about money and finance,’’ Meese said. “Some people have a knack for it and follow it closely. Some people take advantage of the education that’s out there. Some people don’t want any risk.

“There are a lot of options. I believe moving forward, there will be a lot of options that exist with military retirement. It’s going to lessen the impact on taxpayers and I think bring it more in life with the type of retirement and financial options that people can choose from in any line of work.’’