The FRS Pension Option

The FRS Pension Option gives YOU options

Employer-sponsored retirement plans can be split into two groups:

  • Defined Contribution Plans, or DC
  • Defined Benefit Plans, or DB

As their names suggest, the salient feature of the DC plan is the amount that can go into the plan in terms of contributions.  The defined benefit plan, on the other hand, is also known as a pension plan.

With a DB plan, all the retirement risk is with the employer, and not the participant.  There is a pension formula based on years of service and average of your highest 8 years of salary, and the formula calculates a pension amount which is guaranteed over the pensioner’s lifetime, or lifetimes of the pensioner plus spouse.  When I say the risk here is with the employer, I mean the State of Florida.  The employer, of course, invests the retirement plan assets as a whole, and must do so in a way that pays out what has been promised to the plan participants.

The good news here is that Florida’s pension system is found in the top 10 most solvent plans in the nation, being funded at a level to pay upper 80%s to lower 90% of all pension liabilities.  This is in stark contrast to the economic basket case states like Illinois and California.  There, the CA pension system is estimated to be $500 billion – that’s ½ a trillion – underfunded!  What does that mean?  At some point the state will have to cut benefits or raise taxes, or the pension checks are going to start bouncing.

A further point about the FRS pension option is that each participant can make a one-time election to switch to the other plan i.e. from Defined Contribution to Defined Benefit, and the other way around.  Here’s a circumstance where this would be useful to you:

Say you started teaching right out of college, and you thought you’d only teach for a few years until you got married.  Because you thought your FRS employment was to be relatively short, you chose the Investment option.  But now 10 years have gone by, you’re married, and your find your teaching career fulfilling, with no end in sight.  You switch to the pension option, knowing that 30 years participation will entitle you to a DROP payment and early retirement.

Per ERISA guidelines, the maximum defined benefit pension that can be paid to anyone in 2016 is $210,000.

Defined benefit pensions are now usually only found in public employee benefits.  Much of private industry has gotten rid of their pensions in favor of defined contribution plans, where all the risk for the outcome is on the participant himself.  So choosing between a pension and potentially larger investment account at retirement is a choice to be made carefully.  Another salient point, too, is the DROP – Deferred Retirement Option Program, in which pension plan participants can retire, work 5 more years, and have their pension payments accumulate in a DROP account.  This is a very rich retirement, and the topic of another blog entry.

What do you do with your money at retirement?

That depends – and our advice is, of course, to work with us to make wise decisions which are fully in your best interests.  It pains us to hear of so many teachers who have taken unsuitable advice and stuck their DROP payments into annuities.  Our work is always custom, and focuses on the individual needs of the client.  As registered investment advisors we have no product to sell you – we’re not pushing to make a sale so we can generate a commission.  And as CERTIFIED FINANCIAL PLANNERS™ you can count on us for a fiduciary standard of care – meaning unbiased financial advice, always in the client’s best interests.

I hope we’ve provided good information for you here.  If you have any questions, by all means get in touch:  Visit our website at, where you’ll see all of our blog entries and be able to book an appointment to come see us.

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