By Zach Lundak, CFP®, Wealth Advisor
If you are a employed by the State of Nebraska, there are a few decisions you must make regarding your state-offered cash balance plan upon retirement.
The State of Nebraska’s cash balance plan was established in 2002. Involvement in the plan is now required for full-time Nebraska state employees who are over the age of 18. (Some notable exceptions include State Patrol Officers, Department of Education positions, and employees of state-run higher education organizations.) As these individuals face retirement, there are several important factors they must consider regarding the value of their cash balance plan.
At retirement, the first thing that would be valuable to check is whether the retiree is vested in the plan. Meaning, do they have access to all the money in their plan. If the individual hasn’t been employed by the state for at least three years, they may have to forfeit some or all of the account value. Other ways to become fully vested in the account include reaching age 55, becoming disabled, or dying.
Rate of Return
Nebraska’s cash balance plan is an excellent retirement plan as it offers a guaranteed return and does not require employees to make investment choices for themselves. The rate at which the return accrues is the intermediate rate for US bonds plus 1.5%. The minimum guaranteed rate is 5%, which is where the plan has been for the last several years. However, if the market performs well and the employee has an account value on December 31 of the plan year, they may get an extra dividend.
Options at Retirement
• Monthly annuity
• Leave in the account until age 70.5
• Rollover to an IRA
• Rollover to State Deferred compensation plan
• Some combination of all of these options
Notes on Retirement Options
As mentioned above, the cash balance plan account offers a minimum guaranteed return of 5% per year. (An ideal scenario in a volatile market!) If the retiree is in a position where they don’t need this money to support living expenses, leaving the account untouched until they are age 70.5 may make a lot of sense. When they are age 70.5, they can then take an annuity, roll the funds over to an IRA, or take a lump-sum distribution.
A monthly annuity is a good option for people who are healthy and expect to live a long life. There are six different ways an annuity can be structured, with additional options within each of those scenarios. If the retiree is considering an annuity, it is very important that they take their time and make sure they understand the tradeoffs.
A rollover to an IRA would be a good option for people who think they can earn higher than the guaranteed return or those who don’t want their money tied up in a state plan.
The State Deferred compensation plan allows retirees to roll all or a portion of their cash balance plan into it. However, the retiree must have had their deferred comp plan established when they were working for the state. Another other important consideration is that if the retiree rolls a portion of their cash balance to deferred comp, they will need to either purchase an annuity or take a lump-sum distribution with the portion of the cash balance plan that did not roll over.
The state of Nebraska’s deferred compensation plan is an excellent plan and it’s great for participants. The options at retirement are numerous and it’s important to think about them in the broader scope of other retirement income and assets.