As a State of Tennessee municipal subdivision, the City of Brentwood is authorized by state law to participate in the Tennessee Consolidated Retirement System (TCRS), the State of Tennessee retirement plan. The City joined TCRS in July 1973 and offers this defined benefit pension plan, now referred to as the Legacy Plan, to all full-time employees. The City pays the entire costs of participation for employees hired before January 1, 2010. Employees hired after January 1, 2010 are required to contribute 5% of their eligible earnings on a pre-tax basis to share in the cost of this important benefit.
Each participating employer in the TCRS Retirement System is charged an actuarially determined percentage of eligible participants’ payroll expense to fund this benefit. The actuarial rates are calculated annually and can vary from year to year based on the demographics of each group, investment performance, employee turnover, pay rates and other relevant factors.
Effective October 1, 2016, the Brentwood Emergency Communication District became a separate TCRS participating employer and employees of the ECD were removed from the City’s pension plan and placed in a separate plan created exclusively for the ECD. This action was the result of an audit conducted by the State of Tennessee Comptroller that determined it was necessary to comply with laws governing pension plans. Because the ECD was established as a separate legal entity it was required to be a separate participating employer with TCRS.
In 2014 the State of Tennessee General Assembly authorized the creation of a new Hybrid Pension Plan under the Tennessee Consolidated Retirement System. Since July 1, 2014 all new State of Tennessee employees, higher education employees, and K-12 teachers are enrolled in the Hybrid Plan. In addition, many local governments have adopted the Hybrid Plan for their new employees including: Hamilton County, Montgomery County, City of Lebanon, City of Bristol and most recently the City of Gallatin.
Because pension plans carry costs and liabilities that stretch over many decades, the primary reason for the creation of the Hybrid Plan was to limit future liability of pension costs and offer a more sustainable alternative over the long-term. The Hybrid plan limits future pensions costs because it is a combination (or “Hybrid”) of 1.) a defined benefit plan, which guarantees specific payouts to retirees based on a formula and, 2.) a defined contribution plan in which the employer contributes fixed amounts to employees’ 401(k) or similar types of accounts. It reduces pension costs by adjusting the formula used to calculate retirement benefits and raises retirement eligibility requirements compared to the current Legacy Plan.
There are two available option with the Hybrid Plan. One option for larger employers with more than 100 employees, includes a cost control feature that guarantees the cost of this benefit will not exceed 9% of eligible payroll even if the plan’s total expenses exceed certain thresholds. Because the ECD currently only has 11 employees this option is not available as it is for the City’s plan.
The required contribution rate under the Hybrid Plan is 9%. The participating employer contributes 4% of employees’ eligible compensation to a defined benefit component (traditional pension plan) and 5% to a defined contribution component (401K). The employee is also required to contribute 5% to the defined benefit component, the same percentage as exists today under the Legacy plan in place in Brentwood.
An additional feature of the Hybrid Plan is that employees are automatically enrolled in an optional 2% contribution to their defined contribution plan (401K). Employees can opt out of this additional contribution at any time. However, as an incentive for employees to continue to contribute to their individual retirement savings accounts, staff recommends that the City match this additional contribution of up to 2% of employee base pay immediately, provided employees do not opt out of this additional contribution. It is also recommended that the City’s matching contribution include a two year vesting schedule which means employees must complete two years of service to be eligible to receive the City matching contributions. Currently, the City provides this matching incentive to members of the Legacy Plan of up to 3% of base pay after two years of service. State law governing TCRS limits the amount that participating employers are authorized to contribute to employees’ defined contribution accounts to 7%. Because the Hybrid Plan already includes a 5% contribution to the defined contribution component of the plan, the City is limited to only 2% for this additional matching feature. Matching Hybrid Plan member’s optional contributions immediately, with a two year vesting schedule, is designed to partially offset the difference in matching contributions provided to these two groups of employees.
A summary comparison of the benefit and retirement eligibility components of the Hybrid Plan and Legacy Plan is attached. While the Hybrid Plan reduces the lifetime defined benefit portion of the pension plan, the attached benefit earning scenarios developed by TCRS show that if the defined contribution (401(k)) portion of the Hybrid Plan achieves an annual average market return of 6%, the combined annual retiree benefit under the Hybrid Plan would be at least equal to or exceed the annual retiree benefit under the Legacy Plan. Also, the defined contribution component of the Hybrid Plan provides an asset that can be passed to other heirs should there be any assets remaining when the retiree and their primary beneficiary pass away.
Staff believes the benefit of adopting the TCRS Hybrid Plan for future employees will enable the ECD to better control long-term pension obligations while maintaining a competitive position in the labor market by continuing to offer an attractive retirement benefit to new employees. Adopting the Hybrid Pension Plan would reduce the ECD’s cost of this benefit for new employees to 9% of eligible compensation as compared to the current cost of 15.78%. As mentioned above. TCRS does not offer the Hybrid Plan with Cost Controls to participating employers with less than 100 employees. Therefore, the contribution rate for the ECD is subject to annual variation based on group demographics, investment returns and other actuarial assumptions but should always be less than it would under the existing Legacy Plan.
Upon approval of the attached resolution the effective date of participation in the TCRS Hybrid Plan will be determined by the TCRS Board of Trustees after a six-months waiting period and will affect new employees hired after April 1, 2019.
A similar resolution is on the September 10, 2018 City of Brentwood Board of Commissioners meeting recommending adoption of the TCRS Hybrid Plan for new City employees.
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