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Completion Time:  20 min
Basics of Alternative Retirement Plans

Guaranteed Return Plans

In a guaranteed return plan (GR), you and your employer both make contributions to a fund managed on your behalf. The retirement system invests the money for you and guarantees that you’ll earn at least a certain amount on your investment. During your working years, you accumulate contributions and the minimum investment return on those contributions, plus some share of investment returns above that minimum. When you reach retirement, you can choose to convert the accumulated savings into income that is guaranteed for life—which essentially turns your guaranteed return plan into a traditional pension.

Guaranteed return plans are sometimes called “money purchase” or “cash balance” plans. Technically, they are “defined benefit” plans like traditional pensions—the benefit being “defined” is the guaranteed rate of return rather than a fixed amount of income.

Just like guaranteed income plans (traditional pensions), the retirement system in a guaranteed return plan holds all of the money and manages the investments. The people running the system keep track of exactly how much has been contributed in your name, and then track how much of the overall investment return the fund earns should be added to those contributions at regular intervals. So, while individual teachers don’t have to make any decisions about their investment strategy, they also don’t have any control over that strategy.

A typical guaranteed return plan promises a minimum of around 4% on accumulated retirement savings (i.e., contributions from you and your employer). Usually, any investment returns above the minimum amount are shared between employers and employees—some of the additional investments would be added to your account, and the remainder would go to a reserve fund for the system to use in case it needs funds to provide the minimum investment guarantee down the road if investments underperform.

Guaranteed return plans usually provide some options for how you want to use your savings when you retire. All guaranteed return plans will give you the option to take your money as a lump sum. You can also convert this savings, or any part of it, into a monthly check you receive over the course of your retirement—a process known formally as “annuitizing.” Some guaranteed return systems will administer this themselves, so you’d get a pension check just like if you were in a guaranteed income plan. Others use a third-party provider to distribute the annuity.

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