HELENA – Like many states, Montana state and local government employees and teachers have what’s known as a defined benefit (DB) pension systems.
Under a DB plan, employees and employers both contribute to the pension funds through employees’ working careers. The funds are invested and managed by the state Board of Investments.
It provides government retirees with guaranteed monthly pensions of a fixed amount. It uses a formula based on how many years they worked for the government and their highest annual salary, usually averaged over three years.
An advantage of DB plans is that the monthly pension amounts are guaranteed, regardless of how the pension investments might be performing at the time.
Another kind of pension fund is what’s known as a defined contribution (DC) plan, which is similar to the 401(k) plans common in the private sector.
Under these plans, the employer and employee each make contributions to the fund. Employees are responsible for choosing their own investment options.
Under the DC pension system, when workers retire, they receive that pool of money that they and their employers have contributed, plus any investment gains – or minus any investment losses – the fund has incurred.
In contrast to a DB pension, there is no guaranteed monthly pension available for retirees under a DC plan.
For some years, new employees in the Public Employees’ Retirement System have been able to choose if they want to be in the DB or a DC plan. At present, 11 percent are in a DC plan.