ADVISORIES: Deferred Retirement Option Plans Flashcards
Government defined benefit plans should not include deferred retirement option programs for a variety of reasons.
What is GFOA’s recommendation regarding Deferred Retirement Option Plans (DROPs)?
GFOA recommends that government defined benefit plans do not include DROPs.
Why is the cost impact of a DROP difficult to assess?
Because DROP plan provisions blur the distinction between active participation and retirement, impacting plan costs in ways not always readily apparent, and making assumptions on retirement without DROP challenging to test.
How can DROPs conflict with the goals of pension design?
DROPs can reduce lifetime income replacement for a lump sum at retirement, conflicting with the design of defined benefit plans intended to provide lifetime retirement income and support an orderly workforce transition.
Why might employee choice in DROPs lead to increased employer cost?
Employees are likely to select the option most beneficial to them, often resulting in higher overall plan costs, especially if the duration of DROP participation is unlimited.
What specific DROP characteristics often add additional cost and complexity?
Features like extensive enrollment periods, retroactive DROP elections, and misalignment between interest credits and actual plan asset returns can add cost and complexity.
How does the partial lump sum option plan (PLOP) differ from traditional DROPs in terms of cost drivers?
PLOPs allow for a portion of retirement benefits to be taken as a lump sum, but do not share all the potential cost drivers of DROPs since they don’t offer different options during employment.
Why are governments discouraged from implementing DROPs to address workforce conditions?
Because DROPs can complicate benefit communication, cause workforce morale and equity issues, and may not align with changing workforce management objectives over time.
What are common features of DROPs that can provide employees with options to maximize benefits?
Length of DROP election period, length of participation while employed, continued participation after termination, distribution options, and availability of retroactive DROP election.
Why should claims that a specific DROP is “cost neutral” be viewed with caution?
Because in many instances, costs have been substantially higher than anticipated for sponsoring governments, making such claims difficult to accurately assess.
How can workforce demographics affect the advisability of implementing a DROP?
What once was a workforce shortage may become a surplus, and DROPs can work against changing workforce management objectives, especially where pension provisions cannot be modified for existing employees.
