We have heard the possiblity of our pension system adopting a drop plan. No real details yet. Would you mind giving an explanation of how yours works?
I'll chime in on mine because I love the DROP. And from what I've seen, every DROP plan is different.
The simple version is that once you reached normal retirement age/service length, you can choose to "retire" but still keep working and earn your regular paycheck. The city stops paying their matching contributions in your case and your pension payment is calculated and frozen at the rate you would get if you really retired and stopped working. You continue to pay your share of pension contributions, but those payments, as well as your pension payments, are all shuffled into a sort of synthetic account on the books of the pension. My system calls this a "notional account"
What is a “notional” account?
•A notional account only exists on paper.
•There are no separate bank accounts set aside for each participant’s DROP monies.
•The DROP monies are invested along with all other pension assets
Until some changes made about the time I retired, the notional account earned at a rate determined by a 5-year rolling average of what the pension system made on all of its investments. They now limit that in an effort to minimize financial risk to the system as a whole.
What interest rate will my DROP account earn?
•The DROP interest rate is a rolling average of the prior 5 years of the Systems’ annual rate of return, subject to a minimum of 3% and maximum of 7%.
•The maximum can temporarily increase to 10% in the event that the pension system is determined to be 100% funded.
•The DROP account interest rate changes January 1 of each year.
Additionally, each April the pension payment receives a COLA based on 80% of the metro area CPI, and is a minimum of 2.4% and a maximum of 8% (used to be 100% of CPI, minimum of 3% and no maximum).
When you retire and stop working you also stop making contributions to the DROP and have to withdraw from the DROP. Your choices are to either roll your money over into an IRA, or you can roll the DROP balance over into a Post Retirement Option Plan (PROP). Which means you leave the money at the pension and they continue to pay interest based on the same formula as in the DROP. They stop making payments into your notional account and that payment turns into a normal monthly retirement check.
If you retired at age 50 or later, you can make penalty-free withdrawals from the PROP. If you retired earlier than 50 (or 55 when I retired) you can do a SEPP.
I took my DROP money and rolled it into a traditional IRA at Fidelity. So far, I would have been better off leaving it in PROP, but we had a new mayor who was on the warpath and saying a lot of scary things. Nobody knew how it was going to work out and my buddy on the pension board said "we're protected now, but we don't know what the mayor's plans are in the legislature. We don't know how much power he has there or what his intentions are." I figured it was better to have control over my money rather than wake up one morning and find out I had been robbed. Plus, I thought "Hey, I can beat 7%!" Yeah, right. Well, at least I beat the market this year.