WSR 18-03-183
PROPOSED RULES
DEPARTMENT OF
RETIREMENT SYSTEMS
[Filed January 24, 2018, 10:14 a.m.]
Original Notice.
Preproposal statement of inquiry was filed as WSR 13-15-128.
Title of Rule and Other Identifying Information: WAC 415-02-150 How is regular interest awarded and credited to Plan 1 and Plan 2 accounts?
Hearing Location(s): On February 27, 2018, at 2:00 p.m., at the Department of Retirement Systems, Conference Room 115, 6835 Capitol Boulevard S.E., Tumwater, WA 98502.
Date of Intended Adoption: February 28, 2018.
Submit Written Comments to: Jilene Siegel, Department of Retirement Systems, P.O. Box 48380, Olympia, WA 98504-8380, email Rules@drs.wa.gov, by February 26, 2018.
Assistance for Persons with Disabilities: Contact Jilene Siegel, phone 360-664-7291, TTY 711, email Rules@drs.wa.gov, by February 22, 2018.
Purpose of the Proposal and Its Anticipated Effects, Including Any Changes in Existing Rules: The legislature delegated to the department of retirement systems the authority to determine the regular interest credited to individual members' pension accounts. With the exception of the Washington state patrol retirement system (WSPRS), this policy is currently, and has been since the director adopted it in 1977, to credit regular interest quarterly at the rate of 5.5 percent per year. At the end of each quarter, regular interest is calculated based on the balance in the member's account at the end of the prior quarter.
In Fowler v. Department of Retirement Systems, the court of appeals held that the policy could not be applied to transfers from teachers' retirement system (TRS) Plan 2 to Plan 3 because there was no evidence that the department had considered other policies. The court remanded to the department the determination of the policy for the calculation of regular interest for many of the accounts containing funds that were transferred from TRS Plan 2 to Plan 3. The statutes governing regular interest for the TRS Plan 2 accounts that were transferred to Plan 3 are analogous to the statutes governing regular interest on all Plan 1 and Plan 2 pension plans administered by the department. Therefore, the policy adopted will be applied to all individual accounts, and not just to those that were transferred to TRS Plan 3.
The department reviewed alternative methods, and determined that applying regular interest to members' accounts quarterly based on the balance at the end of the previous quarter is the preferred approach. The new rule will apply retroactively to November 3, 1977, to all Plan 1 and Plan 2 individual accounts in the public employees' retirement system, teachers' retirement system, law enforcement officers' and firefighters' retirement system, school employees' retirement system, and public safety employees' retirement system, and prospectively for WSPRS Plan 1 and Plan 2.
Reasons Supporting Proposal: The methodology provides regular interest crediting to the members and supports the goals of a defined benefit plan. Regular interest is to help ensure that individuals who are mandated into membership in one of the public retirement systems are not harmed financially if they leave public employment and withdraw their pension contributions. However, the systems were not designed to create wealth for members who don't qualify for or who choose not to receive monthly pension payments.
The methodology adopted here accommodates the statutory schedule on which employers report contributions to the department and ensures that contributions have been credited to members' accounts before regular interest is calculated.
This rule will also bring the method for applying regular interest to WSPRS members' accounts into alignment with the other retirement systems.
Statutory Authority for Adoption: RCW 41.50.033, 41.50.050.
Statute Being Implemented: RCW 41.50.033.
Rule is necessary because of state court decision, Probst v. Fowler v. Department of Retirement Systems, 167 Wash. App. 180, 271 P.3d 966 (2012).
Name of Proponent: Department of retirement systems, governmental.
Name of Agency Personnel Responsible for Drafting: Johnna Craig, Department of Retirement Systems, P.O. Box 48380, Olympia, WA 98504-8380, 360-664-7219; and Implementation: Seth Miller, Department of Retirement Systems, P.O. Box 48380, Olympia, WA 98504-8380, 360-664-7304.
A school district fiscal impact statement is not required under RCW 28A.305.135.
A cost-benefit analysis is not required under RCW 34.05.328. The department of retirement systems is not identified in RCW 34.05.328 as an agency that must submit a cost-benefit analysis.
This rule proposal, or portions of the proposal, is exempt from requirements of the Regulatory Fairness Act because the proposal:
Is exempt under RCW 19.85.025(3) as the rules relate only to internal governmental operations that are not subject to violation by a nongovernment party.
Explanation of exemptions: Not applicable. This rule does not impact small businesses and is not being submitted by the state board of education.
January 24, 2018
Jilene Siegel
Rules Coordinator
NEW SECTION
WAC 415-02-150 How is regular interest awarded and credited to Plan 1 and Plan 2 accounts?
(1) You are required to make contributions to your retirement plan each pay period.
(2) Your contributions are tracked in an individual account in your name.
(3) If the amount in your individual account on the last day of a quarter is more than zero dollars, the department will calculate an amount of regular interest to be credited to your account on the last day of the quarter using the following formula:
1/4 × R × B
Regular interest will be credited consistent with this subsection, whether or not you are in active service.
(a) In the formula in subsection (3) of this section, "R" represents the rate of regular interest. The director has the statutory authority to set the rate of regular interest. Consistent with that authority, the rate of regular interest is set at 5.5 percent per year, until changed by the director consistent with his or her discretionary authority.
(b) In the formula in subsection (3) of this section, "B" represents the balance in your individual account at the close of business on the last day of the prior quarter. "B" may be equal to zero dollars.
(4) The calculated amount of regular interest will be credited to your individual account on the last day of the quarter. The total amount in your individual account (i.e., all your member contributions plus all the regular interest that has been credited to the account) are your "accumulated contributions."
(5) Your individual account does not "earn" or accrue regular interest on a day by day basis.
(6) Example: Jon had $50,000 in his PERS Plan 2 individual account at the end of the day on September 30, 2017 (the last day of the third quarter). He has $50,200 in his PERS Plan 2 individual account on December 31, 2017, immediately before regular interest for fourth quarter is credited. For fourth quarter, the regular interest to be credited to his account is calculated as follows:
1/4 × 5.5% × $50,000 = $687.50
This regular interest is credited to his individual account for a total of $50,887.50 ($50,200.00 + $687.50) at the end of the day on December 31, 2017.
(a) If Jon transfers from PERS Plan 2 to PERS Plan 3 on January 25, 2018, he receives no additional regular interest for the period from January 1 through January 25.
(b) If Jon separates from service on February 15, 2018, and withdraws the amount in his individual account, he receives no additional regular interest for the period from January 1 through February 15.
(7) This rule applies retroactively to November 3, 1977, to all Plan 1 and Plan 2 individual accounts in the public employees' retirement system, teachers' retirement system, law enforcement officers' and fire fighters' retirement system, school employees' retirement system, and public safety employees' retirement system, and prospectively for the Washington state patrol retirement system Plan 1 and Plan 2.