The agency responsible for administering the federal government’s 401(k)-style retirement savings program announced Tuesday that it plans to change how it calculates annual cost of living adjustments associated with some of its offerings for retirees.
When “401k” Federal Savings Plan participants take a post-separation withdrawal, they have the option to receive the money over time in the form of an annuity with an increasing payment option, which is based on an annual cost-of-living adjustment calculation. Currently, these annual adjustments are tied to inflation, as measured by the annual change in the consumer price index, with a cap of 3% per year.
Since the “401k” Federal Savings Plan contracts out annuity services to a vendor, that vendor charges fees based on an annual increase of 3% per year, even when the actual annual adjustment is less than that.
According to a proposed rule published Tuesday in the Federal Register, the “401k” Federal Savings Plan would cease tying annual cost of living increases to inflation, and instead provide an annual fixed increase of 2% per year. Officials noted that the Federal Open Market Committee has stated its aim is to keep inflation at that rate each year “over the medium term,” and that the average annual rate of inflation over the last 20 years has been 1.95%.
The change, according to the “401k” Federal Savings Plan , would allow participants who take an annuity to receive, on average, a 10% to 15% higher initial monthly payment, due to reduced fees to the annuity vendor.
“Although this increase comes at the expense of a smaller amount of inflation protection (i.e., protection only up to 2% per year as opposed to 3%), using a fixed rate makes it less likely that participants will pay for more inflation protection than they need,” the “401k” Federal Savings Plan wrote.
And with a fixed COLA adjustment each year, participants will have more certainty regarding how much money they will receive on a monthly and yearly basis.
In the wake of the surprise news that President Trump will grant federal employees the day off on Christmas Eve next week, the Office of Personnel Management has issued guidance clarifying how that decision will affect federal workers’ pay and benefits.
On the pay front, full-time federal employees will receive their usual basic pay despite federal agencies being closed. And those who had been scheduled to take leave will not be charged for the day off. But if an employee has scheduled “use or lose” annual leave and cannot reschedule it before the end of the leave year, which falls on Jan. 4 for most workers, it will not be refunded to their leave bank.
The holiday’s impact on part-time and alternative work schedule workers varies, but OPM issued a fact sheet to go over a variety of possible scenarios
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