Pensions 101

Pensions are retirement plans that require employees and employers to contribute to a pool of funds that is retained for the employee's retirement benefit. The money is invested on behalf of the employee, and the earnings generate income that's used to pay the benefit when the employee retires.

OPERS offers its members three pension choices: a defined benefit plan, a defined contribution plan and a hybrid of the two. Here’s how each plan works:

Defined benefit plan

In a defined benefit plan (or DB plan), accumulated contributions and investment earnings are used to pay the member a monthly pension for life after retirement. The pension is paid in the form of an annuity. The contributions typically come from both the member and the employer. It is vital that the employer always remits the contribution, as has been the case for OPERS. Less-funded plans often reside in states that do not faithfully make these payments.

The "defined" portion of a DB plan is the benefit that is guaranteed when participants retire. It's typically paid monthly according to a formula. For OPERS members, this formula is their final average salary, times the number of years they worked, times 2.2 percent.

This benefit will be paid until the member dies. Depending on the payment plan the member chose, dependents could continue to collect a portion of the pension after the member's death.

Contributions and investments of all members in a defined benefit plan are pooled, or combined. Pooling not only provides for lower money-management costs but also allows the fund to weather the ups and downs of the stock market.

Because the plan sponsor is responsible for investing the money and managing the plan, it bears the investment risk of the assets. By investing over multiple decades, the sponsor is better able to withstand market fluctuations while continuing to pay retiree benefits.

OPERS refers to its defined benefit plan as the Traditional Pension Plan, and 95 percent of our members are in this plan.

Defined contribution plan

In a defined contribution plan (or DC plan), the member and the member's employer contribute to an individual account that can be accessed after the member retires. The plan sponsor typically provides several investment options, including mutual funds and target date funds, and the member must choose how the money is managed.

The "defined" portion of a DC account is the contributed amount, not the amount that will be paid out in retirement as is true of a defined benefit plan. The participant can annuitize the accumulated contributions at retirement, but the amount of the monthly benefit depends upon investment returns during the participant's working career.

In this plan, the member assumes the risk that financial markets will perform well enough to ensure an appropriate benefit level.

OPERS refers to its defined contribution plan as the Member-Directed Plan, and 3 percent of our members participate in it.

Hybrid Plan

A hybrid retirement plan includes elements of both a defined benefit plan and a defined contribution plan. OPERS refers to its hybrid plan as the Combined Plan, and 2 percent of our members participate in it.