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Advanced Design Concepts: Hybrid Plans

There are good ways to build Hybrid plans, and bad ways to build Hybrid plans.

Any kind of standard retirement plan design can be combined with another to create a Hybrid plan. Typically, there are two ways this is done: the side-by-side design and the stacked design.

The Side-by-Side Design

The “side-by-side” Hybrid will simply take a small version of one plan design and a small version of another and offer the two of them as separate, but related, parts of retirement savings. A typical version of this kind of Hybrid would include a pension portion (with a 1% to 1.5% multiplier) and a DC plan portion (with a total contribution rate between 4% and 8% of payroll, split in some way between the employer and the employee).

The Stacked Design

The “stacked” Hybrid will offer one plan design as the primary form of benefit, and then have another plan design kick in when the first one is maxed out. An example would be to offer a pension plan for the first $50,000 of salary, and then a DC plan for any salary a person earns beyond that point. Someone who makes $45,000 would effectively only have a pension. Someone who makes $75,000 would get a larger share of their retirement income from the pension than the DC plan.

The typical purpose of offering a Hybrid plan is to balance the pros and cons of various plan designs. Governments might like to reduce their own investment risk by reducing the size of the pension they offer. Yet they still want employees to have a quality benefit, thus adding to the mix a DC plan or GR plan with employer contributions.

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