One of the biggest advantages of being a state employee is participating in a defined benefit retirement plan. When you’re eligible to retire, you’ll receive a monthly payment for the rest of your life. The payment amount is calculated based on your years of service, average salary, and other formulas, not the actual amount you contributed.
These days, this type of retirement plan is increasingly rare, especially in the private sector. While still fairly common among public employers, defined benefit retirement plans are available to fewer than 20 percent of private industry employees.
Today, most employers, especially in the private sector, offer a 401(k) plan for retirement savings. Known as defined contribution plans, these are individual accounts in which contributions build over time. Each employee has the responsibility for determining how funds are invested and funds in the account can be transferred from job to job. Employees have the option of taking out one or more loans against the balance in the account.
In a defined benefit plan, contributions by the employer and employee are pooled into one fund and invested over time.
TRS members sometimes ask if they can opt out of or contribute less to the TRS retirement fund. The answer is no. This is one way the two kinds of retirement plans differ. Defined benefit plans are designed with the assumption that all employees will participate and contribute a set amount. Contributions do not go into individual accounts that would allow an employee to take out loans based on balance of funds in the account.
The Texas Legislature determines the percentage of salary (currently 7.2%) each member is required to contribute to the TRS retirement fund. The state also contributes to the retirement fund an (currently 6.8%) of each member’s salary.
These contributions build over time to fund annuity payments to eligible retirees. About one-third of a retiree’s annuity payments come from employee and state contributions to the retirement fund; investment earnings make up the rest.
Upon leaving state service, TRS members may request a refund of their retirement contributions. They will receive the amount they contributed with interest, minus applicable federal taxes and a possible 10% IRS penalty.
For more questions, please contact the ESO’s benefit’s staff.