LOOKING OUT FOR YOUR BOTTOM LINE
Controlling Plan Costs
No one knows for sure how much your retirement benefits will actually cost until all benefits are paid. But with TCDRS, you have the flexibility and local control to make changes to your plan that can help you manage your plan costs through the years.
Why Do Rates Change?
There are many reasons your required rate can change. Three major ones are plan changes, actuarial gains and losses, and paying more than required.
- Plan changes: When you adopt a plan change, your required rate can change. Benefit increases, including retiree cost-of-living adjustments, cause your rate to go up, while benefit decreases cause your rate to go down. Please note that benefit decreases can only be applied to future employment, not to the benefits your employees have already earned.
- Actuarial gains and losses: Since we don’t know exactly what the future holds, we use demographic and economic actuarial assumptions to estimate what will happen to your plan. As actual experience varies from the estimated, actuarial gains and losses are created. For example, an actuarial assumption is that a certain mid-career employee will get a 3.5% salary increase the next year. Instead the employee gets a promotion and a 10% salary increase. Because of the larger-than-expected salary increase, the individual now has a larger estimated projected benefit than he or she did the previous year. This creates an actuarial loss and could cause your required rate to go up.
- Paying more than required: Choosing to contribute to your plan at a higher elected rate or making an additional contribution can cause your required rate to decrease. To learn more, visit Making Extra Contributions.
For more information on actuarial assumptions and how your rate is calculated, see our Understanding Plan Funding page.
Keeping Rates Stable
Keeping your retirement plan contribution rate stable will help you continue to provide your employees with a reliable benefit while also helping you maintain a more predictable retirement plan budget from year to year. In addition to TCDRS’ rate-stabilizing strategies, there are things you can do to help keep your retirement plan rate stable. You can:
- Adopt an elected rate: Choosing to contribute to your plan at a rate higher than your required plan rate creates a cushion of plan assets that can buffer your plan rate against negative plan experience (such as lower-than-expected investment performance).
- Adjust your plan benefits: You can change your employee deposit rate and employer matching rate, which will have an immediate effect on your retirement plan rate going forward. Increasing benefits increases your rate, while decreasing benefits decreases your rate. (Please keep in mind that you can only decrease benefits going forward. You cannot reduce the benefits your employees have already earned.)
- Pay for a COLA when you adopt it: Making an additional contribution in the form of a lump-sum payment to your employer account at the time you adopt a retiree cost-of-living adjustment (COLA) erases the impact that COLA has on your rate.
TCDRS also has rate-stabilizing methods, including:
- Our funding method: The TCDRS funding method helps keep rates stable by smoothing out actuarial gains and losses over 20 years, and recognizing your plan’s allocated investment returns (when they differ from the expected investment return) over a 5-year period. This helps strike a balance between rate stability and ensuring you continue to adequately fund your plan.
- Our diversified portfolio: Having a broadly diversified portfolio provides employers with more stable investment returns from year to year.
- Our reserve fund: In years when we experience better-than-expected investment earnings, we can build up our reserve fund. The TCDRS Board of Trustees has the option of distributing these reserves to all plans when investment performance is lower than expected.