At Colorado PERA, we live and breathe pensions so much that it’s easy to forget how complex all this stuff can be for the layperson. Particularly if you’re in the earlier portion of your career, with retirement years or decades away, talk of defined benefit plans, contributions, or (in Colorado) automatic adjustments might just leave you scratching your head in confusion.
As you can guess, there’s no shortage of investment terms or informational resources about them. Google “retirement jargon” or “pension glossary” and you’ll find dozens of helpful results. And of course, the PERA website provides reports, fact sheets, articles, and videos about the state’s public employee pension fund, and the PERA on The Issues blog shows these elements in action.
Here’s a short rundown of some of the more frequently used terms you’re likely to run across as you start thinking about your retirement options and plans, or as you organize your finances in general. By explaining and demystifying these words and phrases, we can hopefully help you feel more confident about financial and retirement planning.
Automatic adjustment – This is an innovative provision that was included in last year’s Senate Bill 200 which puts PERA on track to achieve full funding within 30 years. It is essentially a set of “guard rails” that is triggered if PERA falls behind the 30-year goal. The automatic adjustment increases member and employer contribution rates incrementally, raises the direct distribution amount from the State, and reduces the Annual Increase (AI) paid to retirees. Should PERA move ahead of the 30-year goal, these changes may be reversed.
Contribution – The amount of money that you put into your retirement plan, usually on a regular schedule. For PERA, your member contribution is a percentage of every paycheck that is automatically deposited into your PERA account (your employer also contributes to PERA). You may also contribute a percentage of pay or a flat dollar amount toward a 401(k), 403(b), or 457 plan every pay period.
Defined Benefit (DB) Plan – Most PERA members contribute to the PERA DB Plan. It’s a group retirement plan that calculates retirement benefits based on an employee’s years of service, age at retirement, and salary. With a DB plan, you will receive a retirement benefit check every month for the rest of your life. A DB plan is a key tool for recruitment and retention of public service workers (who often earn lower salaries than they could in the private sector) because of the stability and retirement security DB plans create.
Defined Contribution (DC) Plan – DC plans include plans like 401(k), 403(b), and 457 plans and are individual retirement accounts whose benefits are based solely on how much you contribute to your account, plus/minus any earnings, expenses, gains, losses, and forfeitures. You usually decide how much to contribute and which funds to invest in. Your employer may also offer a matching contribution to DC plans. With a DC plan, the amount you receive in retirement is based on the choices you make and you only receive retirement income until your account balance is exhausted.
Distribution – Taking money out of your retirement account in one way or another. This can mean withdrawing your account totally after you leave employment (tax penalties may apply) or becoming eligible for a distribution because you reach a certain age. This can also mean regularly taking money out of the plan to live on when you’re retired.
Rollover – Moving your money from one retirement account to another. For example, you may choose to roll over funds from a 401(k) plan you had at a previous employer to the 401(k) plan offered at your current employer so you can manage all your money in one place. Typically, directly rolling over funds from one qualified plan to another qualified plan means you won’t encounter tax penalties like you would if you withdrew the money and deposited it in your personal bank account and rollovers keep money earmarked for your retirement.
Vesting Period – A period of time that you must contribute to a plan before obtaining non-forfeitable rights to your retirement benefits. Different plans may offer different vesting schedules, so it’s important to research the provisions of any plan in which you participate.
What other retirement or financial terms have you flummoxed? Let us know in the comments.