DEFERRED OPTION: PUBLIC PENSION PLANS ADOPT DROPS FOR OLDER WORKERS; LUMP-SUM PAYMENTS CAN GO AS HIGH AS SIX FIGURES FOR RETIREES
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Coller Capital collects $9 billion with latest secondaries fund
      Directional signs respresenting types of traditional and alternative investments
      Setter: Alternative secondary deals drop 27.7% in 2020
      Kennedy Lewis raises $2.1 billion for latest opportunistic credit fund
      Emma Davies
      Octopus Ventures chooses co-CEO
    • Jason Schwarz, chief operating officer of Wilshire,
      New owners have big plans for future of Wilshire
      Amy Hsiang
      Meketa picks new public markets manager research director
      Will Martindale
      Cardano Group chooses group head of sustainability
      Meketa hires first chief marketing officer
    • Steve Foresti
      Despite a truly frightening March, funds ended year in great shape
      Mexico manages breakthrough in virus-marred year
      Coronavirus throwing retirement systems into a deepening hole
      COVID-19 hinders emerging Europe's hopes for DC boost
    • Jan Jacobson
      High-court ruling thwarts ERISA stock-drop lawsuits
      Joni Tibbetts
      Principal counts on advisers to get word out on PEPs
      Kenneth J. Munro III
      Empower names new national sales director
      Fidelity cuts target-date asset threshold for lower fees
    • Shannon O'Leary
      Resisting diversity could lead to termination
      Ontario Teachers commit to net zero emissions by 2050
      LaSalle Investment Management taps 2 for new ESG roles
      Sovereign credit ratings vulnerable to ESG risks — Moody’s
    • Ryan Tedder
      Strike up the band: KKR fund takes majority stake in Ryan Tedder catalog
      Helen Dean
      NEST’s Helen Dean earns U.K. recognition for service
      Hawk's Nest dam
      Brookfield donates golf course for firefighter training center
      Gifford Fong
      Old ties help bring local version of JOIM to mainland China
    • Shanghai skyline
      Global hedge funds struggle even in a more open China market
      The Sun Hung Kai Properties Ltd. logo is displayed on the Sun Hung Kai Centre building in Hong Kong on Sept. 13, 2018
      SHK spins out East Point Asset Management
      Man holding a business card with Hedge Fund written on it
      Hedge funds chalk up decade’s best returns in 2020 – HFR
      New hedge fund launches surpass liquidations in third quarter
    • Investors ready for change as Democrats take control
      George Antonopoulos
      SPAC launches leap, but institutions are wary
      Inflation fears are good news for ETFs targeting TIPS
    • State Street, Northern Trust both prepare for layoffs
      Marques Benton
      Loomis Sayles chooses first chief diversity officer
      Standard Life Aberdeen CEO Stephen Bird
      Standard Life Aberdeen CEO: Some staff won’t get bonuses
      Nuveen sells holdings in sanctioned Chinese stocks
    • Marcie Frost
      California pension funds learning from experience
      A sign outside California Public Employees' Retirement System headquarters in Sacramento
      CalPERS expecting to announce new CIO this quarter
      The Great Seal of the State of New Mexico in the House of Representatives chamber within the New Mexico State Capitol in Santa Fe
      New Mexico PERA executive director taking new position
      ABP calls for clarity over funding ratio rules
    • The Great Seal of the State of New Mexico in the House of Representatives chamber within the New Mexico State Capitol in Santa Fe
      New Mexico PERA executive director taking new position
      Marques Benton
      Loomis Sayles chooses first chief diversity officer
      Charles Wu
      State Super appoints chief investment officer
      Kenneth J. Munro III
      Empower names new national sales director
    • Pension funds continue private equity investing spree
      Big jump in private equity AUM expected over next 5 years
      Thoma Bravo takes in $22.8 billion for 3 funds
      Jason Thomas
      Data, technology become new prized possessions
    • Chiang Ling Ng
      Hines hires first head of Asia-Pacific real estate investments
      Brand new apartment building on sunny day in spring with blooming trees
      Real estate returns forecast to trend lower – report
      Ivanhoe Cambridge Inc. signage is displayed outside the company's office near Bay Street in Toronto on Aug. 29, 2011
      Ivanhoe Cambridge, PAG announce joint venture for Japan logistics investments
      Residential buildings in Hong Kong on Feb. 20, 2020
      KKR closes first Asia-Pacific real estate fund at $1.7 billion
    • Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Neal and Brady
      Retirement security could be only issue both sides accept
      David Ireland
      Sponsors returning to questions about in-plan annuities
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
    • Retirement in emerging markets
      Outlook 2021
      The top 10 stories of 2020
      The best places to work in money management
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • Houston Firefighters puts $180 million into 3 funds
      LACERA allocates up to $442 million with 6 managers
      BBC Pension Scheme re-signs HSBC as global custodian
      Stanislaus County Employees earmarks $20 million to buyout fund
    • Houston Firefighters puts $180 million into 3 funds
      LACERA allocates up to $442 million with 6 managers
      BBC Pension Scheme re-signs HSBC as global custodian
      Stanislaus County Employees earmarks $20 million to buyout fund
    • International Small Cap Manager Services
      Financial Expertise
      Passive Index Manager Services
      Emerging Markets Equity Investment Management Services
    • Taiwan Semiconductor’s No. 1 in the emerging markets book
      U.S. fixed-income returns post another positive year
      Nasdaq delivers an impressive year
      U.S. dollar's recent decline continues
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Infrastructure cartoon
      You must go big on infrastructure, Mr. President
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
      view gallery
      25 photos
      2020 in editorial Cartoons
      view gallery
      25 photos
      Cartoons depict a year like no other
    • GP-LED OPPORTUNITIES AT THE SMALLER END OF THE MARKET
      Gold Outlook 2021
      Bond ETFs show maturity during Covid market mayhem
      2021 Outlook: A rousing recovery
    • Charles E.F. MIllard
      Commentary: It’s time to make 401(k) plans into real pension plans
      Michael McNally
      Commentary: New ‘investment-plus’ test poses risks to private equity investors
      Adam Waterous
      Commentary: Institutions urged to act now on opportunities created by current global oil disruption
      Ron Lagnado
      Commentary: Straw man critiques don’t hold up in face of real world success
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • Sponsored Content By MassMutual
      Leveraging Data to Manage Risk
      Sponsored Content By iShares
      ETFs are becoming a cornerstone of insurance equity portfolios
      Sponsored Content By Aberdeen Standard Investments
      Taking a passive approach to the hedge-fund universe
      Sponsored Content By World Gold Council
      Gold: the most effective commodity investment
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      1:24
      U.S. stocks were 2020’s comeback kid
      watch video
      1:23
      Outlook 2021
      watch video
      1:52
      Buy gold's pullback?
      Coronavirus and the S&P 500: 2020
    • Getting Back to Normal: How to Creatively Manage Fixed Income Portfolios in a Rising Rate Environment
      Lessons From 2020: OCIO Model Passes Major Test of Governance
      What might a Biden DOL and SEC mean for retirement plans?
      Staying on target with target-date funds
    • POLL: Retirement issues in 2021
      POLL: Money managers' priority in Asia-Pacific region
      POLL: Retirement issues in the presidential election
      POLL: The S&P 500 in the third quarter
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • Riskwatch for Q4 2020
      Graphic: A look at hiring activity in 2020
      Taiwan Semiconductor’s No. 1 in the emerging markets book
  • Events
    • Conferences
    • Webinars
    • Defined Contribution Spring Virtual Series
      DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • Getting Back to Normal: How to Creatively Manage Fixed Income Portfolios in a Rising Rate Environment
      Lessons From 2020: OCIO Model Passes Major Test of Governance
      What might a Biden DOL and SEC mean for retirement plans?
      Staying on target with target-date funds
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. Print
September 06, 1999 01:00 AM

DEFERRED OPTION: PUBLIC PENSION PLANS ADOPT DROPS FOR OLDER WORKERS; LUMP-SUM PAYMENTS CAN GO AS HIGH AS SIX FIGURES FOR RETIREES

Terry Williams
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    Jazz music and Cajun cuisine are two of Louisiana's great contributions to American culture, but they may be surpassed by a "wrinkle" in a defined benefit plan that is putting lump-sum payments -- sometimes of as much as six figures -- into the pockets of civil servants.

    Deferred retirement option plans are the hottest craze on the domestic public pension scene. The first one was implemented by the Baton Rouge and Parish of East Baton Rouge Retirement System in Louisiana in 1982.

    A DROP is basically an alternate payment of the pension benefit.

    There are variations among the plans, but most require an employee who has worked enough years to be eligible for a full pension to continue to work an additional two to five years.

    The employee earns his or her salary, as well as any salary increases, but the retirement benefit earned prior to entering the DROP program is frozen. The employee also doesn't earn any additional service credits.

    The monthly benefit that the employee would have received in retirement is placed into an interest-bearing account; in a few instances, the accounts are self-directed. The employee receives the tax-deferred benefit as a lump sum at the end of the DROP period when he or she retires, as well as the monthly retirement benefit.

    "It's sort of like a giant IRA (individual retirement account)," said Bonita Brown, assistant director of the $11 billion Teachers' Retirement System of Louisiana, Baton Rouge. "You still get a salary, but you are able to save this tax deferred.

    "It's a once-in-a-lifetime opportunity to accumulate a large pot of money and not suffer," said Ms. Brown, whose system has a DROP plan with $435 million for 3,600 participants.

    "It can add up to six figures in a few years," said Leslie Finerty, unit leader of consultant Towers Perrin's retirement division, San Francisco."Most of us can't save that much."

    DROPs are popular among public safety and teacher retirement systems.

    "Police and firefighters can get out at a fairly early age," said Joseph Jankowski, director, retirement plan consulting services with ICMA Retirement Corp., a Washington money manager. "They are in their mid to late 40s and are willing and capable of continuing working."

    Police and firefighters often begin second careers because their options are limited in their first professions.

    "When you are a 49-year-old firefighter, you don't retire and go to another department," said Jeffrey Yates, retirement administrator for the Baton Rouge retirement system.

    Cities and states want to keep the firefighters and police officers rather than incur the expense of recruiting and training new employees, Mr. Jankowski said.

    The motivation with teachers is slightly different. Several states are finding it difficult to attract teachers and are offering DROP plans as an incentive to keep them around for a few additional years.

    Florida, for example, needs 12,000 new teachers annually, but its colleges generate only half that. DROPs are very popular in the Sunshine State.

    The $101 billion California State Teachers' Retirement System, Sacramento, expects to research a DROP in the next few months. "We are in a teacher shortage in California," said Sherry Resser, a CalSTRS spokeswoman. "We would be using this to recruit teachers."

    Teacher retirement systems in Arkansas and Florida have DROPs, Ms. Brown said. Several public funds in Louisiana and Florida have DROPs; there are several in Texas; and they may also be found in Oklahoma, Colorado, Missouri and Maryland.

    "It's been mutating and spreading like a virus," Ms. Brown said.

    There is no accurate measure of the amount of assets held in DROP plans, Mr. Jankowski said.

    ICMA should know. The company is selling a service to administer self-directed DROPs, one of many permutations found with these plans.

    "We don't have a precise dollar amount," he said. "Most DROP assets are still assets of the defined benefit pension plan. The DROP is simply a distribution option. In most cases, it's not accounted for separately."

    Baton Rouge was not trying to entice employees to stay when it implemented its DROP. The administrator and two members of the fire and police pension fund were trying to fight the eroding effect of inflation on the pensions of participants.

    "In the early 1980s, there were hard economic times, and the City Council thought about not approving a cost-of-living increase," said Mr. Yates, the administrator for Baton Rouge's $810 million retirement system, of which $68 million is DROP assets. Mr. Yates was an accountant for the system at that time.

    Charles Carter, the police representative; Curtis Cox, a firefighter who has since died; and Gary Van Oss, the administrator at the time, came up with the idea for the DROP, Mr. Yates said.

    "We jokingly said it would be nice if you could retire and keep working, and live off your earnings," said Mr. Carter, recalling the germination of the idea. The concept sounded better the more the men discussed it, and they eventually asked the system's actuary to run the numbers to determine if it could be done without harming the system.

    The actuary -- Richard F. Camus & Associates of New Orleans -- determined that the plan could be cost neutral if a participant worked 25 years, and if the plan sponsor didn't contribute its 19% to the system.

    Also, the employee would keep his or her 8% contribution to the system since they were retired and also wouldn't be making contributions.

    The only contribution to a DROP is the monthly benefit the employee would have received had he or she retired. Instead of arriving as a check, the money goes into an interest-bearing account for the employee.

    "It was a savings all the way around," said Mr. Carter, who retired in 1989 after 32 years. "It sounded too good to be true.

    "Maybe it took some simple police and firemen to start it up."

    "All the numbers made sense," Mr. Van Oss said. "We can't say anything but good things about it."

    Not much bad is being said about DROPs, but they aren't for everyone.

    For a retirement system, the key is structuring the DROP to be cost neutral. The actuaries' estimate of when an average employee will retire has to match, as closely as possible, the number of years needed to work to qualify for entry into the DROP.

    "If the retirement age is lower, it could compress the time in which benefits need to be funded and it could increase annual funding costs," Mr. Jankowski said.

    Employees also must be encouraged to leave once their period in the DROP plan is ended. Baton Rouge's system imposes severe penalties if an employee doesn't leave.

    "We take away all interest earned and distribute it to the employee as a taxable event," Mr. Yates said.

    An individual may find a DROP unattractive if that employee is expecting a significant increase in salary in the last few years of employment.

    "You won't get that high salary figured into your monthly benefit," Ms. Brown said.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    Targeting millennials: Author, niece put his latest book to music
    Targeting millennials: Author, niece put his latest book to music
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    Research for Institutional Money Management
    Sponsored Content: Research for Institutional Money Management
    sponsored
    Events
     
     
    Sponsored
    White Papers
    GP-LED OPPORTUNITIES AT THE SMALLER END OF THE MARKET
    Gold Outlook 2021
    Bond ETFs show maturity during Covid market mayhem
    Global gold-backed ETFs: A popular gateway to the gold market
    2021 Outlook: A rousing recovery
    Climate change and emerging markets after Covid-19
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center