Police pension and retirement system: a deferred option plan.

Mike--a 20-year veteran of an Oklahoma police department--retired last week at the rank of captain. However, for the next 5 years, he will continue to go to the same building, perform the same work tasks, and receive the same salary, plus his monthly retirement benefit. How can this be? Mike just joined the Police Deferred Option Plan of the Oklahoma Police Pension and Retirement System.

This article discusses how a deferred option retirement plan works. It also examines the advantages and possible disadvantages of the plan, both for the retiring officers and the agencies in which they serve.

Deferred option plans, such as the one Mike joined, work best in States with statewide retirement systems. For example, in Oklahoma, police officers who have 20 years of service may retire with no age requirement. The officers immediately begin to receive a monthly retirement benefit equal to 50 percent of their final salary. For each year of service beyond 20 years, the benefit increases at the rate of 2.5 percent per year, with a maximum retirement benefit of 75 percent after 30 years. Officers may continue to work beyond 30 years, but they receive no additional retirement benefits.

THE PLAN

Officers who have 20 years' service may join the deferred option plan. However, once they submit the paperwork for this move, their decision is irrevocable. After exercising this option, the officers' contributions into the retirement system cease, immediately increasing their net (take-home) pay. The officers then continue to work in the same capacity and receive departmental raises, promotions, etc., although their retirement annuities remain frozen at the level at which they existed when the officers exercised the deferred option. The officers may maintain this status for up to 5 years after entering the deferred option plan.

Once on the plan, the officers' monthly retirement annuities are paid into an annuity account that is administered by the Oklahoma Pension and Retirement System. The monthly retirement benefits, plus investment earnings on these benefits, are held for the officers until their actual retirement.

Here is how the plan might work for Mike, who was mentioned at the beginning of this article, if his final salary (annualized salary over the last 30 months of employment) is $50,000 and there is a modest rate of return on the retirement system's investment portfolio of 6 percent per year. Mike's retirement benefit after 20 years would be 50 percent of his final salary, or $25,000. Twenty-five thousand dollars per year placed into his deferred option account, plus 6 percent interest would yield an account value of over $149,000 in 5 years.

Because Mike's retirement benefit is frozen at the time he joins the deferred option plan, his retirement annuity would freeze at $25,000 per year--it would not increase during his final 5 years. Of course, the $149,000, properly managed, could augment his yearly pension considerably.

However, the officer who benefits most from this plan is the one who has reached the maximum annuity level of 75 percent. If, for example, Mike had entered the plan after 30 years rather than 20 years of service, he would, at the end of 5 years, have an account balance of over $224,000. In essence, the deferred option plan allows Mike to receive 150 percent of his salary for 5 years (including the funds that go into savings), while his colleagues in the plan with 30 years' service receive 175 percent of their final salary.

ASSESSING THE PLAN

Clearly, advantages and disadvantages exist for both the agencies that offer this type of plan and the personnel who choose to enter the plan. Agencies must decide whether such an arrangement is feasible for their particular needs, and personnel must decide whether it fits their long-term financial and career needs.

Agency Advantages and Disadvantages

Law enforcement agencies benefit from this type of retirement plan in two fundamental ways. First, they retain experienced officers and executives for a longer period of time; second, managers can identify and plan for future vacancies.

The U.S. Census Bureau estimates that by the year 2025, more than one-quarter of the U.S. population will be age 60 or older.(1) This means that the American workforce, including those in law enforcement, is aging. Bearing this in mind, it is to the agency's advantage to keep experienced officers who wish to continue working in a profession they find rewarding.

The second benefit law enforcement agencies derive from this type of retirement plan is the ability to identify and plan for future vacancies. The inability to predict upcoming staff vacancies greatly thwarts the planning process in police agencies. Administrators who incorrectly predict staff vacancies may be forced to simply select the next name on the list of managers--an ineffective way of selecting managers.(2)

A deferred option retirement plan assists police executives because it defines a 5-year window in which retired officers may leave. Fortunately, most who opt for the plan tend to complete the full 5 years, resulting in greater predict-ability of staff vacancies.

On the downside, every agency has some marginal employees in its ranks. Therefore, to the extent that the deferred option plan encourages some nonperformers to stay in their jobs solely for financial reasons, the agency is not well-served by such a retirement plan.

In addition, the plan can significantly alter the internal demographics of agencies, at least in terms of age. This, in turn, requires that police administrators change leadership styles, because when demographics change, existing philosophies and operational policies of law enforcement agencies often become less effective.

Advantages and Disadvantages to Officers

Officers enrolled in this type of retirement plan receive obvious financial benefits. Prior to the availability of the plan, officers who were near retirement age would seek employment in a position that paid half of their preretirement salaries in order to equal their previous salary. However, the deferred option plan allows officers to earn 150 percent of their current salaries for 5 years, although 50 percent of this salary remains unavailable for immediate use. In order to match such a financial arrangement, officers eligible for the plan would need to secure a retirement position that pays 100 percent of their final salary in order for the position to be as economically attractive. In most cases, this would not be easy to do.

In addition, officers who enter the program enjoy the immediate benefit of a larger paycheck. This is because they stop contributing to the larger retirement system.

A significant disadvantage to officers who exercise their option to join this type of plan is that their retirement annuity is frozen when the option is exercised. This means that they do not benefit from the additional 2.5 percent a year for additional years of service, and any substantial increases in salary during the 5 years of participation in the plan would not increase their retirement benefits.

Additionally, the benefits of this plan may encourage officers to remain in law enforcement, even though they may be suffering from burnout or may believe that they have plateaued. Staying in a profession for financial reasons places both psychological and emotional strains on employees. In these cases, a disservice is done to both the employees and the agencies they serve.

CONCLUSION

The Oklahoma Deferred Option Plan provides an attractive method to stay in law enforcement while providing additional financial security for retiring employees. It also allows law enforcement agencies to retain experienced police officers longer than they could if this type of plan were not offered. However, potential disadvantages also exist for both the agencies and the officers.

Clearly, a deferred option plan is not appropriate for every officer or agency. Where appropriate, however, it is a worthwhile option for law enforcement agencies to pursue.

Endnotes

1 G. Bennett, Crimewarps: The Future of Crime in America (Garden City, New York: Anchor Press/Doubleday, 1987).

2 R. Hough, "How Deep is Your Bench?" The Police Chief, November 1991, 30-36.