If you’re like me, you completed your mandated Blended Retirement System (affectionately known as BRS from here on out) CBT and found yourself saying, “Holy smokes, that CBT was educational AND surprisingly enjoyable!” Just kidding. Many of us likely took the approach of, yep, uh huh, I’m sticking with the traditional system…don’t care…can I possibly click through these slides any faster…where’s the shortcut to the slide where I get my certificate!?! But, with the conversion deadline looming, have you truly given the BRS a fair shake to analyze whether or not it may be the right choice for you? The answer may very well surprise you and be the difference of (literally) hundreds of thousands of dollars over the course of your life. Additionally, if you intend to continue your service into 2018, you truly need to understand the BRS no matter your eligibility or personal decision regarding the BRS. As leaders of the future, we must be prepared to educate the military service member who had no choice in the matter, on the good, the bad and the ugly of the BRS and how to utilize the system to maximize its potential to suit their needs. This article hits the highlights of the DoD’s BRS and explains why every Servicemember should know the rules inside and out.
WHAT IS THE BRS?
Primarily, the BRS is a combination of the traditional pension system and a defined contribution element via the Servicemembers’ Thrift Savings Plan. Additional elements of the BRS include continuation pay (a mid-career bonus) at the 8-12 years of service (YOS) mark and a lump sum option at retirement. The new retirement system was created under the FY16 National Defense Authorization Act. (If you’re looking for a real page turner or are having trouble sleeping, read the DoD’s BRS Implementation Plan…the link is in the Sources section at the end…you’re welcome!)
The new pension multiplier will be two times YOS under the BRS. Meaning 20 (YOS) multiplied by two will give you 40% of your average base pay from your top three years as your monthly pension in retirement. The old system uses a two-and-a-half-time multiplier and nets the retiree 50% for 20 YOS. But this is where the legacy system ends while the BRS has additional compensation elements.
The defined contribution element of the BRS is a bit complicated, but here’s what 99% of us need to know. After 60 days of service, the government will start contributing 1% of the Servicemember’s basic pay to their TSP whether or not the individual is contributing any of their own funds. This 1% contribution will continue through the 26 YOS mark. The matching element begins AFTER 24 months of service and allows Servicemembers to receive a total 10% contribution to their TSP as long as they’re contributing 5% of their own base pay. That breaks down to 5% from the member, plus the automatic 1% and 4% matching the member’s contribution. No matching will occur after 26 YOS (sorry GOs)! See the table below for the breakdown on matching:
There is a vesting requirement for both the auto 1% and the government matched contributions. When one becomes vested (after 24 months of active duty), they get to keep that money. If a member separates prior to vesting, the government will take back the unvested funds 1% DoD contribution from your TSP. The auto 1% contribution becomes vested on the 1st day of the 25th month of service. The government matched contributions are vested immediately upon deposit into the members’ TSP.
The continuation pay element of the BRS will occur between the 8-12 YOS mark and is intended to help with retention. Think of the continuation pay as a reenlistment bonus. In order to receive continuation pay, active duty personnel must be eligible and capable of serving at least an additional three years on active duty. The reserve component has additional qualification requirements spelled out in the DoD’s Implementation Plan. The amount of continuation pay will be no less than 2.5X base pay and no greater than 13X base pay for active duty personnel. For reservists, the multipliers range from 0.5X to 6X of the active duty base pay for someone with their grade and YOS. Each branch will determine when in the 8 to 12 year range they choose to offer continuation pay and what multiplier will be used. If I were a betting man, the multiplier will depend on retention needs in your specific military specialty. Think of it as a mid-career cash bonus!
Continuation pay may be received as a lump sum or spread out over a maximum of four years. If you fail to complete your additional years of service that were required in order to receive continuation pay, Uncle Sam will insist on getting some of that money back. Bottom line is that once you reach eight YOS and you are enrolled in the BRS, you should consult with your local finance office to determine your eligibility and payment options as each branch will release their continuation pay details on an annual basis.
Under the BRS, Servicemembers will also have the option to receive a discounted lump sum payment of their retirement pension. The lump sum option must be “turned on” no later than 90 days before their retirement date if desired. The member will be able to select to receive 25 to 50 percent of their “gross estimated retirement pay.” The gonkulator that determines how much that 25 or 50% lump sum pension payment would be and what it would cost the retiree per month out their pension is extremely convoluted. It’s outlined in the DoD’s BRS Implantation Plan Attachment 2. If you can make sense of it, you’re a better scholar than I. Bottom line is that before a BRS retirement eligible member hits their 90 days until retirement date, it’d be in their best interest to consult military finance for specifics on their lump sum options.
WHEN DOES IT GO IN TO EFFECT?
The program goes in to effect on 01 Jan 18. Any service member serving as of 31 Dec 17 will be grandfathered in to the legacy “50%” system while any Servicemember joining on 01 Jan 18 or later will automatically be enrolled in the BRS with no opportunity to move under the legacy system. (Ok, now you’re thinking, if the BRS is so awesome, why don’t they give people the option…we’ll get there, don’t worry). For those of us grandfathered individuals, the entirety of 2018 is an opt-in period for “Active Component Service members with fewer than 12 years since their Pay Entry Base Date, and Reserve Component Service members who have accrued fewer than 4,320 retirement points as of December 31, 2017”.” During the opt-in period, people meeting the above criteria can “opt-in” to the BRS.
WHY YOU SHOULD CARE?
Before we get in to the nuts and bolts, lets address the why. For those joining after 31 Dec 17, the BRS and how effectively you use it will determine how much money you walk away when your service ends. For those with the opt-in option, you should want to make an informed decision because there is no take-backsies! That’s right, if you opt-in to the BRS, there’s no turning back. Luckily, if you’re reading this within about 60 days of my fingers hitting these keys, you’ve got about a year to decide to act and opt-in or do nothing and keep it original.
Now, the old salty folks like me that have no options, we’ve got nothing to worry about…like it or hate it, we’re under the legacy system for better or for worse. However, I would argue that the majority of us have the greatest responsibility of all. Many of us are the supervisors and commanders of those with a really big decision to make in 2018. Personally, I consider it my duty to be the best educated person in my shop so that I can assist my young guys with options in making an informed decision and ensure they know about all of the resources that are available to help them make their decision. We are also going to be the supervisors and commanders of the next generation of Servicemember that will have to budget for and contribute to their TSP in order to maximize the benefits under the BRS.
Though retirement pensions in America are rare breed these days, the traditional military retirement system is certainly not without flaws. The most glaring is the fact that at present only 49% of officers and a miniscule 17% of enlisted personnel meet the active duty requirement of 20 years of service and receive a pension. While some folks may receive some sort of compensation when they leave the service prior to 20 YOS under other programs or special offerings, most Servicemembers separate with a “Thank you for your service.” Everyone’s situation is drastically different and life tends to happen and the BRS ensures that everyone who wears the uniform (and serves 24 months plus one day) will walk away with some cash in their retirement account whether they contributed to their TSP or not.
The continuation pay will provide a nice jolt to the finances of Servicemembers near the mid-point of their military careers and hopefully help slightly with retention at the same time. The lump sum element of the BRS is a great option for retirees who are willing to give up a chunk of their pension for a large cash injection at retirement if they’re looking to start a business or make a large real estate purchase.
There is also the potential to receive more retirement money during a Servicemembers’ golden years under the BRS versus the legacy system. But, in order to have any chance of matching or exceeding the lifetime financial benefits or the legacy retirement system, Servicemembers will have to contribute 5% of their pay from 25 months and onward (in order to max the government matching) and the market will have to cooperate (one’s TSP would have to average approximately an annual return of 7% or greater).
In order for people to achieve anywhere near the lifetime benefits of the legacy retirement system, they will have to consistently max the defined contribution portion of the BRS. Without, the numbers don’t come anywhere close. TSP also provides limited investment opportunities which hinders upside potential for the savvy investor. For the casual investor, this could lead to significant underperformance if the wrong funds are chosen. Overcoming this will require education. If young investors are putting portions of their money in the L, G or F funds, they are going to drastically underperform the S&P 500 benchmark over their lifetime. Supervisors must ensure their BRS troops have the resources to make educated fund choices with their money!
Servicemembers, as a whole, are notoriously bad savers and live from paycheck to paycheck. I don’t say that to throw spears at anyone but I’m keeping it real based on what I’ve experienced in over 15 years of service. Look, I understand that there are plenty of young enlisted and officer families doing the right thing, being fiscally responsible and I applaud all of you for doing so! The fact of the matter is that this is the exception more than the rule. With the BRS in place, financial education and the promotion of good saving habits will be paramount. Why does this matter though? Here’s an example of how I see the BRS playing out for far too many people: They enter the service at 18-20 years old with minimal personal finance experience or education. In their 25th month of service the matching window opens but they’re focused on paying off that vehicle they shouldn’t have purchased after tech school. When that car is paid off, they start maxing out on the matching (we’ll say YOS 6). Shortly thereafter life happens (marriage, honeymoon, children, etc)…TSP contributions get “put on hold” for a while. Somewhere between YOS 8-12 the continuation pay kicks in but instead of catching up on the TSP, that money goes toward paying off debt. With retirement in sight, the holy s!$t factor kicks in and contributions pick up in the home stretch for a few years. At retirement, the lump sum option is too good to pass up and the Servicemember cashes in 25-50% of their retirement benefit to pay off some more debt and finally take the family on a vacation. Servicemember X now has 50-75% of their originally 40% pension left and a small sum in their TSP to show for 20+ years of dedicated service.
I know that’s a long hypothetical. The point is that I see far too many Servicemembers falling far short of the fancy projections in the BRS calculator due to poor financial choices in their early years of service and then life happening after that. For many, the continuation pay will provide some much-needed debt relief instead of being a retirement boon. And at retirement, the lump sum option will be far too enticing for many to pass up and lead to many sacrificing a large chunk of their pension. While it is good that the BRS will ensure that all Servicemembers walk away with something, the ugly truth is that it is very likely that Servicemembers as a whole will receive significantly less financial benefits under the BRS.
Whether we’re talking the utilization of the BRS for the first generation of Servicemembers or the opt-in decision itself, education is going to be the key to success and I can’t stress that point enough! The BRS is a phenomenal opt-in program for all who are unsure if they plan to make the military a career but they MUST take advantage of the matching in order for the BRS to have a meaningful impact on their retirement years. I’ll say it again…education is the key! I’m hoping that the DoD will provide “adequate” training on this front…but I’m a realist and understand it’ll likely be a brief lesson in initial entry training and a CBT that most people click through as hastily as possible. At the end of the day, it’ll be the individual that suffers if they don’t get the needed education. Contact your local finance office to get information on resources at your base. In my opinion, it’ll be on the leaders of today’s military to ensure the leaders of tomorrow have the education and resources they need to make informed decisions. Now go forth and get rich!