A Big Decision

February 2017

By Bob Haskell
(read online digital version)

Looming changes to the retirement system will force most Guardsmen to think far ahead and make a choice affecting their future finances. Fortunately, guidance is available

Consider the plight of a traditional reserve- component senior noncommissioned officer who called it quits after about 16 years, roughly four good years shy of locking in his military pension.

Consequently, he couldn’t draw a dime in retirement pay after his 60th birthday a number of years later. He had left all of his retirement points and “high three” income years on the table when he walked out of his installation’s door.

Many other less demanding jobs might have provided something for his later years, but not the U.S. military, where retirement pay is 20 years of service or bust.

His situation would be different if the Blended Retirement System had been available in his day. He could have received automatic government contributions to a 401(k)-style Thrift Savings Plan (TSP) account, along with government matches of his contributions. He also would have learned more about retirement investing along the way.

That may be a lesson worth considering this month as the Defense Department begins educating its rank and file on how BRS, described by one official as “one of the most significant changes to military pay and benefits that we’ve had over the past 70 years,” could affect their finances.

The changes will force 1.8 million service members to make a big decision: opt into BRS or remain under the old system. These are active-duty personnel, including those in the Active Guard and Reserve (AGR), with less than 12 years in uniform or traditional Guardsmen and Reservists with less than 4,320 retirement points as of Dec. 31, 2017.

They have a 12-month window beginning Jan. 1, 2018, the day BRS will be implemented, to opt in. The earlier the better to fully leverage the new system’s benefits. If they don’t opt in, they will be grandfathered into what will then be the legacy system, joining those whose length of service or retirement points exceed the above amounts. No one will be automatically moved into BRS, defense officials stress.

The Jan. 1, 2018, start date also gives the Defense Finance and Accounting System (DFAS) the time needed to reprogram computer networks and train thousands of pay clerks down to the unit level on the blended system. Significant change—some defense officials say the word “radical” isn’t a stretch— requires significant time to implement.

BRS was born aboard the fiscal 2016 National Defense Authorization Act after its conception in the Military Compensation and Retirement Modernization Commission, which issued its final report in January 2015.

“What’s good about the Blended Retirement System is you no longer have to stay for 20 years or get nothing,” says Joshua Andrews, a USAA military-life advice director and lieutenant colonel in the Air Force Reserve. “The government helps those who leave the military in fewer than 20 years with their retirement savings. And it gives people greater control over their careers.”

USAA, which doesn’t stand to gain directly from BRS, is helping to educate service members, its customer base, on the nuances of the new system, which is intended to provide 85 percent of the force with retirement benefits.

Currently, most leave the military with nothing for their retirement. Only 19 percent of service members—and only 14 percent of Guardsmen and Reservists—remain in uniform for two decades, according to Pentagon figures.

That’s the primary reason why NGAUS (Our Take, page 31) teamed with four other influential associations to push the blended system on Capitol Hill. More options and portability were other factors. There is, however, a downside: a smaller pension for those who do serve 20 years.

The Actual Blend

BRS includes provisions the Pentagon believes are necessary to promote retention, maintain the all-volunteer force and protect service members who retire due to disabilities, defense officials explained when the proposal was formally submitted to Congress in June 2015.

It blends a traditional 20-year cliff-vested retirement pension with contributions to each service member’s TSP account. The savings in the TSP is theirs entirely after two years of service. They can leave the money in TSP or roll it into another qualified retirement account when they leave the military.

BRS also turns the TSP from an optional to a mandatory program. Everyone will be enrolled when they join the blended system.

That’s one new twist to a retirement program that has been part of the U.S. military since 1861 when Congress authorized a voluntary system for officers. Retirement pay for active enlisted personnel began in 1885, and the current reserve retirement program began in 1948.

There are other twists. BRS also provides continuation pay for mid-career people who agree to serve no less than three additional years. The amount will range from half a month’s pay to six month’s pay for Guardsmen and Reservists. AGRs receive between 2.5 and 13 times their monthly pay as a bonus, the same as active component members.

The blended system also provides an option for participants to take 25 or 50 percent of the value of their pension up front as a lump sum when they begin collecting retirement pay, which is at age 60 for most Guardsmen and Reservists.

Taking the lump sum will decrease the monthly benefit until the participant reaches Social Security’s full retirement age of 67. The actual lump sum is also subject to a “discount” due to total value of the pension being less upon the initial receipt of retirement pay than later due to expected inflation. The Pentagon plans to announce the initial discount rate later this year.

This is the most controversial option in BRS. Many observers say service members would be foolish to take the lump sum, sacrificing future finances for quick cash. But NGAUS believes it could be a timely option for those who need a large sum to buy a house or start a business.

The new system also reduces the multiplier for 20- year pensions from 2.5 percent to 2 percent for calculating monthly checks. This provision pays for the options and figures to make the overall program a money-saver for the Pentagon.

BRS will become the retirement system for everyone who signs up for the active component or joins the Guard or Reserve beginning next January.

“This modernization puts the retirement system in line with what’s available in corporate America,” says Col. John Williams, an Army Reservist and an assistant director for military compensation policy in the Office of the Secretary of Defense (OSD).

“It offers the Thrift Savings Plan, a chance to attain a portable government retirement for those members who don’t meet 20 years, while keeping the pension for those reserve-component members who do stay for 20 years. There are not too many opportunities to receive a pension for the rest of your life anymore.”

Guard and Reserve members will still have to wait until age 60 to collect their pensions, unless they qualify for reduced-age retirement because of 90-day deployments.

“The Blended Retirement System is a key step in modernizing our ability to recruit and retain individuals for the military because it provides them with options that were not previously available,” says Maj. Michael Odle, a District of Columbia Air Guard officer who also serves at OSD.

But they are options, not requirements. Those familiar with BRS are almost unanimous in stressing two points. One, this is an individual decision that service members have to make in conjunction with their families. And two, this is the first time many in uniform have had to seriously consider their military retirement.

“There is no single right answer for those individuals who have the option as to which system is better,” Odle says. “It’s purely based on their own personal circumstances.

“It’s important to note that all of 2017 is about educating our service members, and that they don’t need to make a decision at this point. The opt-in period starts Jan. 1,2018, and service members will have that entire year to make their decision.”

Homework Required

In the past, people could put their retirement on autopilot. Now folks are being encouraged to take charge of their financial future early and keep it in their sights, Odle adds.

That will require them to take the training and full advantage of all of the information and resources that are being made available by the Pentagon and specific agencies such as DFAS. Private companies that serve the military, like USAA, also have a wealth of information available.

The opt-in video course, which was set to launch Jan. 31, is mandatory for all who are eligible to convert to the new blended system. It is available on Joint Knowledge Online, Military OneSource and at http://militarypay. defense.gov/BlendedRetirement.

“Once [a service member has] completed the course, it will be annotated in their training records,” Odle says. “If they decide to opt into the BRS, they will make that election for the Army and the Air Guard through myPay. If they decide not to opt in, or don’t think it’s the right retirement plan for them, they simply do nothing and will be grandfathered into the legacy retirement program.”

Seeking financial advice is also strongly recommended, as long as it’s good advice, preferably from an organization with a sound military track record.

“If they’re going to talk to their own financial advisor, they need to make sure that person understands the military lifestyle, understands military benefits, and is really versed in the differences between the Blended Retirement System and the ‘high three”’ USAA’s Andrews cautions. “Their advisor may understand stocks and bonds and mutual funds wonderfully, but that’s not what we’re talking about here.”

As we enter the final year before implementation of the new system, the curiosity temperature is rising.

“The questions started about two, three months ago. People just want to know if it’s beneficial to them to opt in or not,” says Sgt. 1st Class Marty Phelps Jr., the Maryland Army Guard’s retirement points accounting manager. “I’m giving them the information papers that I have. I tell our soldiers not to go looking at Wikipedia, that they need to pull material from the DFAS website where the information is accurate.”

 “There’s a lot of confusion,” acknowledges Andrews, referring to a survey of USAA’s active-component and reserve members who fall into what he called “the middle bucket,” those who have to make a choice.

“Twenty-five percent of those who responded said they’re not knowledgeable about the Blended Retirement System,” he says. “Forty- five percent said the BRS is a negative change. Forty-nine percent said they’re sticking with the current plan, that being the ‘high three,’ no matter what.”

Andrews points out some things to consider.

Nearly half of the respondents plan to stay with the system that will benefit less than 20 percent of the force, those who stay in for at least 20 years. “In general, a lot of people misunderstand their chance of actually making it to a military retirement,” he says.

Others could harbor unrealistic expectations of the TSP, which is influenced by market factors. Those who think they’ll earn, say, a 30 percent return from their investments are probably kidding themselves, he says.

Guardsmen and Reservists who have a 401(k) or qualified plans with their civilian jobs may have to monitor their TSP accounts so that their combined elected deferrals don’t exceed the Internal Revenue System contribution limits of $18,000 a year. Otherwise, they risk paying taxes and penalties.

But such concerns are the exception. Recent studies show that 70 percent of families have less than $50,000 total in their 401(k).

Andrews offers a couple of other pieces of advice. Although no one can opt in to BRS until 2018, members should learn about the provision and they should start planning for retirement now if they’re thinking about switching to BRS.

“They need to contribute at least the 5 percent [to TSP] to get the full match,” he says. “So start planning for that now.”

It may take several years after people begin enrolling in 2018 to determine what, if any, impact the blended system will have on the force.

But Williams did predict that “the BRS will provide additional flexibility that will support the diverse reasons that people decide to join and remain in the Guard and Reserves.”

BOB HASKELL is a retired Maine Army National Guard master sergeant and a freelance journalist in Falmouth, Massachusetts. He may be contacted at magazine@ngaus.org.

Our Take

NGAUS teamed with the Air Force Association, Association, the Enlisted Association of the National Guard of the United States, the Reserve Officers Association and the Veterans of Foreign Wars to push the Blended Retirement System into the fiscal 2016 National Defense Authorization Act. The five associations, which represent more than three million members, believe the current system benefits too few and lacks the options, flexibility and portability of a 21st century retirement system. NGAUS wanted the lump-sum option to be available to traditional National Guardsmen and Reservists immediately upon retirement. However, the law specifies it is available only upon the “receipt of retirement pay,” which means Guardsmen and Reservists have to wait until age 60. All five associations insisted on financial literacy training in conjunction with BRS. If this is carried out properly, service members will be ahead of their civilian peers at a time when studies show that many Americans wait far too long to begin saving for their retirement. If you are eligible to opt into BRS, NGAUS recommends you take your time and fully weigh the two systems against your military career track and aspirations and fully consider your family situation, investment-risk-tolerance and other retirement-savingsprograms before making a decision.