401(k) 101: How PERA's Defined Benefit Plan Compares

February 27, 2018

If you’ve been following along with this month’s series on the 401(k) plan, you should have (hopefully) gained a foundational understanding of not only how this widely-adopted retirement plan came to be, but also how it operates. It would seem only natural, then, that we wrap up February’s blog series with another look at PERA’s defined benefit plan.

OK, so it probably sounds absurd to be talking about a defined benefit plan when we’re supposedly addressing all things defined contribution. But here’s the catch—this isn’t your grandpa’s pension plan. Rather, PERA’s retirement plan blends the best of two worlds: a traditional pension plan and a defined contribution plan. So, clearly it’s as relevant to this month’s blog series as it was to last month’s.

With its hybrid design, PERA's plan benefits short-term public employees as well as those who spend their entire career in public service.

Quick sidebar: You might recall from this earlier post that a standard pension requires one to stay with his or her employer for a loooong time in order to maximize the benefit received. In some instances, if an employee decides to leave prior to becoming vested in the pension, he or she essentially forfeits all contributions/money put in. Oof.

This is because all PERA members, regardless of how long they remain with their employer, are entitled to the full amount of their contributions plus interest. It’s this portability aspect of the plan—the ability to take one’s money with him or her following termination—that emulates a defined contribution plan design, and ultimately makes it so unique.

The hybrid nature of PERA’s plan also happens to deliver the highest percentage of salary replacement income in retirement—for short-term as well as career public employees. And that’s not according to us; that’s what an independent, third-party firm commissioned by the Colorado General Assembly found.

According to that firm's report, PERA’s defined benefit plan provides the most income replacement at retirement at the lowest cost when you compare it to other types of retirement plans in use today—including the good ol’ 401(k). In other words, regardless of someone's age or length of service, no plan “provides a more effective level of benefits than the PERA hybrid plan.”

The image below shows just how this level of income replacement stacks up against the competition.


So, whether you end up working in public service for three years or 30 years, your PERA retirement plan will pay off (or rather, pay you) in the long run. Leave your money with PERA when/if you move on from public service, and you’ll receive a monthly benefit for life (thanks to the defined benefit aspect of the plan). However, should you wish to withdraw your money upon leaving PERA employment, you’ll still be entitled to take all your full amount of member contributions plus interest (and that’s thanks to defined contribution aspect of the plan). It truly is the best of two worlds.

Well, folks, that’s a wrap on our “401(k) 101” series, but don’t you worry—there’s more fun coming your way next month with a look at the third and final “leg” of the retirement stool: Social Security.