Pentagon Backs 401(K)-Like Plan in Military Retirement Overhaul

The U.S. Defense Department supports overhauling the decades-old military retirement system with a new 401(K)-like plan that troops could take with them after they leave the service.

The Pentagon on Wednesday released details of the proposal, which mirrors one of the most controversial recommendations earlier this year from the independent Military Compensation and Retirement Modernization Commission.

"The department considered all elements of current and potential retirement plans and built a blended system that -- in the military judgment of the Department of Defense -- best enables us to maintain the readiness of the all-volunteer force," Pentagon spokesman Army Col. Steve Warren said in a release.

Like the commission's proposal, the new retirement system would for the first time offer a 401(k)-like defined-contribution plan to the vast majority of troops -- more than eight in 10 -- who leave before the 20-year mark and don't receive any retirement pay.

The Defense Department said troops enrolled in the new Thrift Savings Plan would initially receive matching contributions from the department of 1 percent of his or her basic pay. They would be fully vested after two years of service and eligible for additional matching contributions of up to 5 percent after four years of service. The commission had proposed a similar plan.

The Pentagon also said troops would also be eligible for a bonus, or continuation pay, after eight to 16 years of service, depending on their branch of service, which would have the flexibility to set the rate. The commission had proposed that active-duty service members would be eligible for a lump-sum continuation payment equal to 2.5 months of basic pay after 12 years – provided they agree to stay in the military for another four years.

While the Defense Department described its proposal as a "blended defined benefit and defined contribution," it didn't offer details on how it would change the existing pension.

Navy Lt. Cmdr. Nate Christensen, a Defense Department spokesman, only said that future service members would receive 80 percent of the current pension if they serve 20 years, and would have the opportunity to achieve nearly equivalent or better retirement benefits when they reach retirement age.

Under the existing defined-benefit plan, most officers and enlisted personnel who serve 20 years receive annual retirement pay equal to half of their average basic pay over their last three years of service. Legislation proposed in Congress would support the commission's recommendation to reduce that figure from 50 percent to 40 percent.

President Obama said he wants more time to review proposals that would overhaul troop pay and benefits, including retirement.

His administration "fully supports" the underlying objectives of recommendations made in January by the congressionally appointed panel, according to a letter he sent lawmakers in late April. Indeed, the president supports 10 of the panel's 15 proposals designed to save $12 billion a year in personnel costs by 2040.

But the White House wants to better understand the most controversial proposals, including offering troops 401(k)-like retirement plans before they reach 20 years of service, replacing the existing Tricare program with a choice of commercial health insurance options, and consolidating commissary and exchange stores on bases, among others.

"With respect to the remaining recommendations, given their complexity and our solemn responsibility to ensure that any changes further the objectives above, we will continue working with the Commission to understand how the following proposals would affect the All-Volunteer Force," he wrote.

-- Brendan McGarry can be reached at brendan.mcgarry@military.com