The state of Florida offers a choice between two retirement plans through the Florida Retirement System, or FRS: a traditional pension plan and a 401(k)-type investment plan. The right plan to choose depends on a number of factors, such as how long you've worked for the state, how long you expect to continue working for the state, the amount of control you want to have over how your retirement funds are invested and how you want to receive your benefit when you retire. Review the information the state provides on both options and consult with your financial adviser before you select a plan.
FRS Pension Plan
You can choose to participate in the FRS pension plan, a traditional defined benefit plan that pays you a monthly benefit from when you retire until you die, regardless of how many years that might be. The amount of your benefit is based on a formula that considers your age, the number of years you worked for the state and the average of your eight highest years of salary. You also have the option to receive a reduced benefit so that if you die before your spouse, your spouse continues to receive a portion of your benefit until she dies
Pension Plan Characteristics
Unlike many pension plans that are fully funded by the employer, the FRS pension plan requires you to contribute 3 percent of your pretax pay to participate in the plan. Unless you work at least eight years for the state, you forfeit all your contributions to plan. If the plan's investments don't perform well, there is a risk that the Florida legislature will modify the plan and reduce the amount of the benefit you receive when you retire. If you already have 25 or more years of service, or you expect to spend most of your career with the state, the pension plan might be a good option for you.
FRS Investment Plan
You also have the option to participate in the FRS Investment Plan, a traditional 401(k) plan. You must contribute 3 percent of your pay to the plan, and the state makes an additional 3.3 percent contribution. You are always entitled to receive any contributions you make, and you're entitled to the state's contributions after working for one year. If you leave and work for a different company, you can leave your money in the plan and continue to manage how it's invested, or you can take it with you and deposit it in a similar account with your new employer.
Investment Plan Features
With the investment plan, the state provides you with a choice of investment funds and you choose how to invest the money in your account. When you retire, you're entitled to receive the balance in your account plus any future investment gains. You can withdraw the full amount or purchase an annuity that pays you a guaranteed monthly benefit until you die. If you're young, you want control over your investments and you don't plan to work your entire career for the state, the investment plan might be worth more when you retire than your pension plan benefit. The Florida legislature has the ability to modify the amount the state contributes to the investment plan on your behalf.
Steve McDonnell's experience running businesses and launching companies complements his technical expertise in information, technology and human resources. He earned a degree in computer science from Dartmouth College, served on the WorldatWork editorial board, blogged for the Spotfire Business Intelligence blog and has published books and book chapters for International Human Resource Information Management and Westlaw.