Military Retirement Overhaul Calls for DC, DB Blend

The commission report noted that flexibility is a key attraction to younger workers, who will increasingly make up the military force.

"The All-Volunteer Force increasingly comprises Service members born after 1980, members of the 'millennial' generation. Research has shown members of this generation change jobs frequently and tend to favor flexible retirement options, rather than the defined benefit pension plans preferred by previous generations."

Those younger servicemembers who leave before completing 20 years of service are eligible for some benefits, the report noted, including education benefits and employment assistance, but are not eligible for retirement benefits.

Military retirees tend to be younger than retirees from other industries. The average enlisted servicemember is 43 with 22 years of service at retirement, according to a May 2014 report from the Congressional Research Service, and the average officer is 45 with 24 years of service.

The proposals change "who bears the risk for those who make it all the way through their career, but we ought to be very careful as we move forward," Spiker said, noting the average savings in a DC plan for investors between 56 and 64 is $80,000. "I think all of us can see that for a good portion of Americans, defined contribution plans have worked well, but for a good portion of Americans, they haven't worked well at all."

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Spiker said it remains to be seen what form the final bill takes. "Right now we're in the throes of the House and the Senate working to modify their proposals."

"They're taking a retirement benefit that serves about a sixth of the military, the career force, where the risk is entirely on the U.S. government and they are shifting it to a defined contribution plan where the risk for their eventual retirement sits solely on the shoulders of the servicemembers," he added.

A survey of servicemembers by First Command found that 69% of respondents are in favor of the proposal being offered, but 61% said they'd still like to use the current defined-benefit style plan, Spiker said.

"People like options, especially when they're free options. The way this has been construed, if you're serving today, you get to keep what you have or you can trade it for what's behind door No. 3," he said.

In addition to the proposal for the retirement system overhaul, the commission made 14 other recommendations that would affect military benefits.

One of the biggest is an increase in financial literacy education provided for servicemembers. The commission report referred to a 2008 study by the National Bureau of Economic Research that found newly hired employees who had access to "relatively simple planning tools" increased enrollment from 12% to 21%, an increase that was two to three times "the effect of employer matching, and more cost effective."

"If Service members are provided the financial education necessary to make informed choices when utilizing a DC plan, they would be more likely to use the plan and more likely to make choices tailored to their individual situations—an important component of a modernized retirement model," according to the report.

"By [the commission's] own admission in their executive summary, only 12% of service members recall ever having had financial literacy training," Spiker said, referring to a 2013 Blue Star Families Annual Lifestyle Survey that asked servicemembers if they had ever received financial information from their command or installation. "So we're going to give you this much more complicated, much more likely to blow up in your face set of solutions, but you freely admit that 88% of you haven't had financial literacy training."

He pointed out that the fiduciary burden of helping military members make the right choices has become more complicated. "With these options, they have a number of career choices where they need to make the right choice and the disciplined choice. If they do not do that, if they don't keep their assets in tax-deferred vehicles and put a sufficient amount in, they, like the rest of society, are going to wake up without security in their retirement years."

Spiker urged Congress to "be very cautious" in approving a reformed military retirement plan. "People need to have choices laid out for them that aren't easily undermined," he explained. "My fear is if you give folks a big lump sum payment at the 12-year point at a time when they've got families that are emerging and they've got long deployments, if these folks are not savvy at the time that money shows up, they could find that by not investing it and compounding it for the next 40 years, that they've really hindered their ability to retire securely."

Ultimately, Spiker said, "These are the folks that we ask to go to faraway places for very long periods of time, leaving their families to fend for themselves. Do we really want to put them in this much financial risk and ask them to become wizards of their own finances when they're deployed in places where they cannot affect those finances on a daily basis?"

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