D.R.O.P. — A benefit to everyone
One of the most unique things that Florida pensioners have is the Deferred Retirement Option Program (aka DROP). We’re going to discuss how D.R.O.P. works and how it’s a benefit for public employees, tax payers, the economy, and the pension plan.
How DROP Works
The average DROP Accrual balance is $146,039 as of September 2016, with balances ranging from a few thousand dollars to over $1 million. So the question is, “Who’s paying for this!?!?” – As one very confused spouse asked me during a retirement meeting.
The DROP Accrual’s are self funded by the retiree. When an FRS participant is eligible for retirement they can elect to go into DROP and continue to work for between 5-8 years, based on the employer. During that time, they get the same salary, raises, promotions, and benefits, but they’ve retired from their pension plan. Instead of the participant’s pension payments coming to them, those payments are paid into a pre-tax qualified retirement plan on their behalf. The only thing that the pension plan pays into the DROP Accrual is the 1.3% interest.
When the participant decides to separate from service, they have a choice to rollover their DROP money into a tax qualified account, take a lump sum distribution, or do a combination of both.
How DROP Benefits Public Employees
This one is pretty obvious: $146,039 average accrual balance. Unfortunately, many public employees have not saved adequately for retirement, and that’s true now more than ever because of the pension plan changes in 2011. This extra accrual helps make up for that shortfall of savings.
How DROP Benefits Taxpayers and the Economy
How DROP Benefits the Pension Plan
The average life expectancy is now in the mid 80’s, and while this is great for us as a society, the current pension plans were established decades ago by actuaries who were working off of the life expectancy tables at that time.
When someone enters DROP they retire from the pension plan, which means they do not accrue additional service credits for those 5-8 years. Which means that if a participant didn’t enter DROP but stayed those same 5 years the pension plan would have to pay 8% more for life for standard risk employees / 15% more for high-risk employees.
Also, the pension is paid out based on the participants highest 5 years of income. Once the participant goes into DROP those 5 years are locked in, meaning that any future raises do not go towards their pension
It’s my opinion that DROP is one of the best ideas that pension plans have ever come up with. People ask me all the time if the DROP Program will be around in the future. I don’t know if it will be around, but if the people making the decisions truly understood the benefits, I think it will be around for a long time.
If you’re part of a pension plan that does not offer DROP, please forward this article to your pension decision makers or have them contact our firm, and we’d be more than happy to discuss the benefits.