DENVER - Service credits in the Public Employees' Retirement Association of Colorado's $27.6 billion defined benefit plan have been going like hot cakes since the plan began allowing employees to use deferred compensation assets to buy them.
Service credits can provide an employee with early retirement, more retirement money or both, said Rick Larson, PERA director of benefit services.
The program allows employees to purchase additional units of time, adding to the level upon which their ultimate retirement benefits will be based. Since defined benefit plan benefits are calculated using a formula based on the employee's age and how long he or she has worked with the employer, an employee can increase his or her monthly lifetime retirement benefit. For example, a teacher with 25 years of service could use money in his 401(k) account to buy another five years of service credits and retire with the pension of someone who had 30 years of service.
Although public employees have been able to buy service credits with their own money for years, they could not use deferred compensation assets for the purchase until it was allowed by the Economic Growth and Tax Relief Reconciliation Act of 2001, which took effect Jan. 1.
Officials expected the number of employees buying service credits to increase by 50% as a result of the federal pension act. Instead, the number nearly tripled, to 542 new purchase agreements in February from 165 agreements in February 2001. In March, 699 agreements were set up, compared with 133 in March 2001. "Those are huge increases I did not expect," he said.
In fact, employees added almost $32 million to the defined benefit plan in January alone, another $37 million in February and $47 million in March, compared with a total of $6 million for January 2001.
On March 25, the fund received 294 checks totaling $4.7 million, a higher volume in a single day than the fund experienced in an entire month last year, he said.
So far, most public employees are buying between three and five years of service to add to their benefit calculations, Mr. Larson said. "Some people bought 20 years," he added.
Purchasing additional service credit could add up to a significant increase in retirement benefits. For instance, a 52-year-old retiree with 25 years of service credit will get 51.3% of highest average salary, he explained. But if that retiree were to buy an additional five years, retiring with 30 years of service credit, the benefit would be 75%.
"There was a great deal of pent-up demand that we hadn't anticipated," Mr. Larson said.
PERA officials expect employees to continue shifting their defined contribution assets into the defined benefit plan at the same rate through at least September, when the latest round of school employee summer retirements will be over, he said.
"I think it will level off at a higher level than before," Mr. Larson said.
Colorado's service credit provisions were already fairly liberal to encourage portability, Mr. Larson said - many states allowed public employees to purchase service credits with cash, but not with money from any defined contribution plans.
Colorado public employees had been able to use 401(a), 401(k) or Keogh plan money to purchase service credits since the late 1980s, Mr. Larson said. As of Jan. 1, EGTRRA also allows employees to use money from 457, 403(b) and individual retirement accounts.
Although Colorado PERA has only a defined benefit plan and a $578 million 401(k) plan, PERA members who work in municipalities also have access to 467 plans through cities or counties, and many school district members have access to 403(b) plans through their districts, Mr. Larson said.
The bulk of the money being used to buy service credits comes from these local 403(b) and 457 plans, Mr. Larson said. Many of the members are cashing out their deferred compensation plans to buy more service credits because they want guaranteed retirement benefits, he added. "It empowers them to look at their retirement planning."
People are choosing the defined benefit plan over their deferred compensation or defined contribution plans by "voting with their dollars," he said.