What is the Oregon PERS IAP (Individual Account Program)?
If you’re a member of the Oregon Public Employees Retirement System (PERS), you’ve likely encountered the term “Individual Account Program” or IAP. But what role does it play in your retirement plan, particularly with respect to the other parts of your Oregon PERS benefits like your pension and the other retirement accounts you may be contributing to? I get this question a lot from Oregon PERS members, and anytime I hear a question more than once, it tells me I ought to create a resource around it.
If you process information best in written format, carry on. If not, check out the video below:
What is the Oregon PERS IAP?
The Individual Account Program (IAP) is a retirement savings account established for all PERS members after January 1, 2004. It’s designed to complement your PERS pension, offering a way to grow your retirement savings through investment returns.
How Contributions Work
The IAP is funded by 6% of your salary, which is contributed by your employer or deducted pre-tax from your paycheck. However, as of 2020, if you earn over a certain threshold, a portion of these contributions will be redirected to the Employee Pension Stability Account (EPSA).
Senate Bill 1049 and Its Impact
Changes brought by Senate Bill 1049 mean that higher earners (in 2024, that’s defined as those with a monthly salary over $3,688) have a portion of their 6% contribution diverted into the EPSA. For Tier 1/2 employees, 3.5% goes to the IAP, 2.5% goes into the EPSA. For OPSRP members, 5.25% goes to the IAP, and 0.75% goes into the EPSA. However, you can make voluntary after-tax contributions to ensure your full 6% continues to go into your IAP, maximizing your savings potential (more on that below).
Investment Strategies: Oregon PERS IAP Target-Date Funds
Since 2018, the IAP has adopted target-date funds. These funds adjust the investment strategy based on your retirement date, starting aggressively with stocks and gradually shifting more into fixed income as you near retirement. I think this is a good option for people who prefer a “set it and forget it” approach to investing. It helps prevent ending up with a 90% equity allocation that may have been suitable in your 30s but not in your retirement years. If you have an unmonitored, fixed portfolio and there’s a market downturn when you’re close to retirement, it could negatively impact your retirement savings. The Oregon PERS IAP program will automatically be placed in a fund aligned with your retirement age, but you can choose a different fund during their change window (September of each year).
Benefits of Target-Date Funds
- Automatic Adjustments: The fund adapts to your age, reducing risk over time.
- Hands-Off Approach: It simplifies retirement investing, as adjustments happen automatically.
- Flexibility: You can switch to a different fund with a different risk tolerance.
Oregon PERS IAP Account Growth
Your IAP balance grows through contributions and investment earnings, but it’s important to remember that market fluctuations can cause both gains and losses. Administrative fees are also deducted annually from fund earnings.
Market Performance and Risk
While investment returns can significantly increase your savings, there’s also a risk of losses due to market volatility. This differentiates the IAP from the guaranteed pension benefit, making it a more dynamic but less predictable part of your retirement plan.
How the Oregon PERS IAP Works at Retirement
When you retire, your IAP must be retired along with your pension. You can choose from several distribution options:
Lump-Sum Payment: Withdraw Your Full Balance at Once
Pros:
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- Immediate access to the full balance, which can be used for large purchases or investments.
- Provides full control over how and when to use the funds.
Cons:
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- Entire balance is taxable in the year of withdrawal, potentially pushing you into a higher tax bracket and kicking off cliff taxes like Medicare IRRMA surcharges.
- No opportunity for continued growth through investments.
Installments: Spread Your Balance Over Time
Pros:
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- Spreads out tax liability, potentially keeping you in a lower tax bracket and avoiding surcharges mentioned above.
- Once retired, installment payments are invested in the Oregon Short-Term Fund, which is designed for stability.
Cons:
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- Less immediate access to the full balance for large expenses, and potentially lower growth potential than if invested in a moderate portfolio.
- Payments cease if you pass away, unless designated for beneficiaries.
Rollover: Move Your Balance to an IRA or Another Qualified Plan
Pros:
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- Continues tax deferral until withdrawals are taken.
- Provides more flexibility with investment options and distribution timing.
Cons:
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- Depending on fees and investment choices, potential for added management complexity.
- Future withdrawals are still subject to taxation.
What Happens in the Real World
Most of the client families I serve end up rolling their Oregon PERS IAP into a rollover IRA. Because there’s already an element of fixed income that comes to all Oregon PERS employees by way of a pension, in addition to Social Security, people typically want more choice around their taxable income in retirement. When rolled into an IRA, the IAP can offer up flexibility around distribution timing until you hit required minimum distributions (RMDs), and even then, there are some options to keep that RMD income out of your retirement (Check out our blog: What is a Qualified Charitable Distribution (QCD)?).
The Role Oregon PERS IAP Can Play in Retirement
The IAP is an important pre-tax savings vehicle that complements the pension’s guaranteed income, allowing members to grow additional retirement savings through investment returns. Unlike the pension, which provides a fixed income based on years of service and salary, the IAP offers a flexible, market-driven component that can help cover gaps in retirement expenses, especially for members who seek a more robust financial plan.
When paired with the Oregon Savings Growth Plan (OSGP) 457(b), the IAP allows members to enhance their retirement strategy by building savings in multiple pre-tax vehicles. The 457(b) plan offers another opportunity for tax-deferred savings, while the IAP can grow alongside it, providing members with the potential for increased financial security.
Designating Beneficiaries and Distribution Rules
Should you pass away while working or before completing your installment payments, the remaining balance is passed on to your designated beneficiary. These beneficiary designations can help avoid probate by allowing your account balance to be directly transferred to your designated beneficiary upon your death. This ensures that the funds are distributed quickly and efficiently, bypassing the often lengthy probate process. Additionally, designating a beneficiary provides peace of mind, as your retirement savings will go directly to the person or entity you choose, offering financial protection for your loved ones.
All this makes updating your beneficiary designations an important part of your financial and estate plan.
Maximizing Your Oregon PERS IAP Contributions
To make the most of your IAP, consider these strategies:
1) Voluntarily After-Tax Contributions
2) Review Your Investment Options Annually
You can review and change your target-date fund each September (it’s not a coincidence I’m writing this in September!). If you choose to move away from the default target-date retirement fund, make sure your selection aligns with your risk tolerance and retirement timeline.
3) Use the IAP Calculator
The Oregon PERS IAP Retirement Estimator is a tool designed to help members estimate the potential value of their Individual Account Program (IAP) at retirement. Users can get a projection of their future IAP balance and the installment payment options available by entering factors such as current account balance, contribution rates, and years until retirement. This tool helps members plan how their IAP savings will contribute to their retirement income.
4) Update Your Beneficiaries
Keep your beneficiary designations current to ensure your funds are distributed according to your wishes.
Where to Learn More About Your Oregon PERS IAP
Conclusion
The Oregon PERS IAP is a crucial part of your retirement strategy, offering flexibility, growth potential, and a way to supplement your pension. Understanding how the IAP works, taking steps to maximize your contributions, and carefully planning your distributions can help ensure a more secure retirement. Visit the Oregon PERS IAP webpage to learn more about the IAP and how it can complement your retirement plan.
If you’re looking for a thought partner on how your IAP factors into your unique financial plan, don’t hesitate to reach out. I welcome the conversation.
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