In a hybrid retirement plan, your employer provides access to two compatible retirement benefit structures at the same time. A typical hybrid plan combines a small guaranteed income plan with a defined contribution plan. Employer contributions to the DC portion of the hybrid will likely be smaller than if the DC plan were offered on its own. Some states provide hybrid plans where the employer finances the pension portion, and the employee finances the DC portion. Hawaii has paired a guaranteed return plan with a guaranteed income plan.
The Overview & Typical Example:
Some retirement plans mix and match elements of multiple retirement plan designs into a combined “hybrid” structure.
A common example is pairing a small guaranteed income plan with a small defined contribution plan. In that case, the guaranteed income plan would have a lower than usual multiplier, such as multiplying years of service by 1% instead of 2%. Employers would make a small contribution into a defined contribution account for employees, and that individual pot of retirement savings would be managed like any other DC plan. Upon retirement, you can take the value of the DC account as a lump sum or blend it with the guaranteed income plan to receive larger pension checks.
Other kinds of hybrid plans include:
- Pairing a guaranteed income plan with a guaranteed return plan, like Hawaii does for all teachers and public-sector workers.
- Providing a guaranteed income plan up to a maximum level of compensation, such as $80,000, and then offering a defined contribution plan for any earnings above that level. Arizona provides this type of plan for its police officers and firefighters, with the pension based on final average income up to $110,000.
A Uncommon Example of Creativity:
South Dakota is one of the more forward thinking states when it comes to retirement plan design. They offer new members a retirement plan that mostly looks like a pension, but has numerous elements that mean it could also be classified as a Hybrid plan.
- The base benefit is a guaranteed income pension plan, that uses a 1.8% multiplier on years of service.
- Employees with 3 years of service or more can leave with their own contributions, plus interest, plus 85% of that amount matched with employer contributions (this is not common).
- Employers make contributions of up to 1.5% of payroll to a “variable account” for each member that is used to increase the value of pension benefits at retirement. These benefits are not portable and do not belong to the employee. But if the employee stays and qualifies for retirement, the money and any investment returns on the variable account are converted into income and added on top of the base pension benefit.
- Employees are also auto-enrolled in an optional DC plan. This is a nudge to participate in a supplementary retirement savings plan, but not a requirement and employees can choose not to participate or contribute.
The Pros and Cons:
There are various ways that retirement benefits can be offered. Each can be measured against different kinds of objectives. Here is how Hybrid plans compare to other retirement plans on a few common goals that states and local employers have for offering retirement benefits in the first place.