Voluntary Defined Contribution (VDC) vs. Tier 6

Retirement planning can feel overwhelming, especially when you’re faced with the prospect of choosing between two different types of retirement options right when you begin your new job. If you’re a government employee in New York, you may be confronted with the decision of whether to participate in the Voluntary Defined Contribution (VDC) Program or rely on the Tier 6 Pension Plan. If you’re looking for more information on the pension system, view our article on Pension Tips for Municipal Employees.

This decision is crucial because it determines not only how much you’ll save for retirement but also how much flexibility and control you’ll have over your future financial security. On one hand, the Tier 6 Pension guarantees a set monthly income in retirement, which can be reassuring. On the other hand, the VDC Program offers greater control over how your retirement savings grow, with the potential for higher returns, but without the certainty of a fixed payout.

You might be wondering: which one is better for me? Do I stick with the guaranteed pension, or does the flexibility and growth potential of the VDC offer more benefits in the long run? The challenge lies in understanding the trade-offs between security and flexibility, and making a decision that aligns with your retirement goals.

A Real Issue

I’ve worked with several clients who, like many public employees, found themselves unsure about how to balance these two options. One particular client, a new employee in New York, faced the dilemma of whether to stay with the Tier 6 pension or enroll in the VDC program that was being offered to new employees.

When she first looked at the VDC option, she felt uncertain about the market-based nature of the program. She was accustomed to the reliability of her pension and was hesitant about giving up that stability. After she decided that she wasn’t going to be in her public service position for long enough to reach the vesting period, she went with the VDC option.

This experience shows that there’s no one-size-fits-all answer, but by understanding the details of both programs, she was able to make an informed decision.

A Few Definitions

Now that we’ve outlined the issue, let’s clarify the differences between the Voluntary Defined Contribution (VDC) Program and the Tier 6 Pension Plan, as well as the specific rules that come with the VDC.

Voluntary Defined Contribution (VDC) Program:

The VDC Program is a retirement savings plan that allows employees to contribute a portion of their salary into an account managed by investment providers. The contributions are made on a pre-tax basis, meaning the employee’s taxable income is reduced by the amount they contribute. The funds grow tax-deferred until withdrawn, and the employee is responsible for managing their investments within the plan.

Here are the key features of the VDC program:

• Eligibility: To be eligible for the VDC program, an employee must:
  • Be hired on or after July 1, 2013, as an unrepresented (non-union) employee.
  • Have an annualized salary of $75,000 or more.
  • Not be currently a member of any New York pension system.
  • Not currently be represented by a Union.
• Contribution Amounts: Contributions are based on salary brackets:
  • Annualized wages of $75,000 or more = 4.5% of salary.
  • Wages between $75,001 and $100,000 = 5.75% of salary.
  • Wages over $100,000 = 6% of salary.
• Employer Contributions: The employer contributes 8% of an employee’s salary to the VDC account. However, these contributions are only made once the employee has met the vesting requirements.
• Vesting Period: Employees must complete 366 days of City service to become vested in the VDC program. Once vested, the employer’s contributions will be fully directed to the employee’s VDC account. If an employee leaves before reaching the vesting period, they are entitled to their own contributions plus interest.
• Enrollment: Employees must enroll within 30 days of their hire date.

Tier 6 Pension Plan:

The Tier 6 Pension is a defined benefit plan offered to certain public employees in New York State, including those who work for the City of New York. The Tier 6 pension guarantees a specific monthly benefit in retirement, calculated based on a formula that takes into account an employee’s salary, years of service, which pension system you’re in, and age at retirement.

Unlike the VDC, the Tier 6 Pension does not depend on the performance of investments. Instead, it offers predictable, lifelong income once an employee reaches retirement.

Which Do I Select?

If you’re trying to decide whether to choose the VDC or Tier 6 Pension, here’s a step-by-step guide to help you make an informed decision:

Assess Your Eligibility and Financial Situation

Begin by reviewing the eligibility requirements for both plans. The VDC program is only available to employees who were hired after July 1, 2013, and meet the income threshold of $75,000 or more. If you’re already in the Tier 6 pension system, you are not eligible. You must enroll in the VDC within 30 days of hire.

Assess your current income and future financial needs. If your salary is higher than $75,000, the VDC could offer a significant opportunity for growth with the 8% employer contribution. If you’re newer to the workforce, the Tier 6 pension can provide a reliable income in retirement.

Understand the Impact of Vesting and Employer Contributions

The VDC’s 366-day vesting requirement means that you won’t receive the employer contributions until you’ve completed a year of service. This VDC contribution will be placed in the plans General Account or Fixed Account for the first year. After that, you will have investment discretion.

If you’re planning to stay with the New York municipal government for a short time period, this is a good deal. Additionally, the employer’s 8% contribution is a significant bonus, which can boost your retirement savings.

On the other hand, the Tier 6 Pension may be appealing if you value the predictability of a defined benefit. However, understand that your pension will likely be modest compared to what you could accumulate with a well-managed VDC.

Make Adjustments Based on Your Goals

As you approach retirement, continue to evaluate your goals. If you find that your pension alone will meet your income needs, you can reduce your VDC contributions. On the other hand, if you need more retirement income, continue contributing to the VDC and explore other investment options.

Work with a Financial Advisor

Navigating these decisions can be complex, so it’s a good idea to consult with a financial advisor who specializes in retirement planning for government employees. They can help you model different retirement scenarios and ensure you’re on track to meet your financial goals.

Choosing between the Voluntary Defined Contribution (VDC) and the Tier 6 Pension is an important decision that depends on your financial situation, career plans, and retirement goals. While the VDC offers flexibility, growth potential, and a match from your employer, the Tier 6 pension provides the stability of guaranteed income.

Understanding the rules and requirements of both options will enable you to make a more informed decision.