The Department of Defense could save billions of dollars and improve military recruitment and retention by adding a defined contribution retirement plan, an advisory group said Thursday.
After a multiyear review and public hearings, the Military Compensation and Retirement Modernization Commission issued final recommendations that include switching to DC plans, in order to attract new recruits and to offer more retirement security for current members of the military, who now have a 20-year vesting requirement.
The commission submitted its recommendations Thursday to the White House and Congress, which will hold hearings next week.
The commission said 83% of enlisted personnel and 51% of officers “receive no retirement savings for their service.”
Citing the need to protect the value of the current benefits package but also to give the uniformed services “modern and relevant compensation tools to continue to recruit and retain,” commission officials called for keeping the existing system intact for current members, but offering a defined contribution plan for new entrants. Current participants, whose defined benefit would be reduced to 40% from the current 50% of pay, would have the option to switch to the DC plan.
Under the proposed reforms, new service members would be automatically enrolled in the $439.6 billion Federal Thrift Savings Plan, Washington, at 3% of pay and their employer would contribute 1%. After two years, employers would match the employee contribution up to 5%. Employees could opt out, but will be automatically re-enrolled at 3% each year.
“It definitely requires greater scrutiny,” said Mike Hayden, deputy director of government relations for the Military Officers Association of America. “Our concern is still over the modeling of this in light of the health-care changes,” also recommended by the commission, which will see members pay a higher share of retiree health-care costs.
According to a Rand Corp. study for the DOD released in November, only 34% of officers and 14% of enlisted personnel benefit from the current defined benefit system because of the vesting requirement. Rand researchers said a hybrid plan reducing the defined benefit component and adding a DC plan could save between $1.8 billion and $4.4 billion each year and improve retention.
As of Sept. 30, the Military Retirement Fund had $545 billion in assets.
In 2011, a high-level Pentagon advisory panel recommended the Department of Defense Military Retirement Fund switch to a DC plan and make other pension reforms that could save $250 billion over 20 years. Without changes, the Washington-based military retirement fund's total liability is projected to grow to $2.7 trillion by fiscal year 2034, the panel said.