Is an OPERS Plan the Same as a 401k Retirement Plan?

An OPERS plan is not the same as a 401(k) retirement plan. While both are designed to provide income during retirement, they operate under fundamentally different structures. An OPERS plan, a pension for public employees, is a defined benefit plan, whereas a 401(k) is a defined contribution plan available to private sector employees. This difference influences everything from how they are funded to who bears the investment risk.

Understanding the OPERS Plan Structure

A Public Employees Retirement System (OPERS) is a type of defined benefit plan provided to government workers. Under this structure, the retirement benefit is a predetermined monthly payment for life, not an account balance that can be depleted. The system, rather than the individual, assumes the risk of ensuring funds are available to pay these promised benefits.

Funding for an OPERS plan is mandatory for both the employee and the public employer. These required contributions are pooled into a large trust fund managed by professional investment managers hired by the retirement system. The individual employee has no control over how these assets are invested. The goal of the fund is to generate returns that, combined with ongoing contributions, will be sufficient to cover all promised pension payments to current and future retirees.

The lifetime pension benefit is calculated using a precise formula. This formula multiplies a member’s years of service by their final average salary and a set percentage, often around 2.2%. For instance, an employee with 30 years of service and a final average salary of $70,000 might receive an annual pension of $46,200. Before an employee has a right to these benefits, they must meet vesting requirements, which is the minimum number of years one must work to qualify for a pension.

Key Features of a 401(k) Plan

A 401(k) plan is a defined contribution retirement savings plan offered by private employers. Unlike a pension, the final retirement benefit is not promised or defined. Instead, the ultimate value of the account depends entirely on the contributions made and the performance of the investments chosen by the employee. The employee bears the investment risk.

Contributions to a 401(k) are primarily made by the employee on a voluntary, pre-tax basis, up to an annual maximum set by the IRS. Many employers offer a matching contribution, such as 50 cents for every dollar the employee contributes up to 6% of their salary. This employer match is an immediate return on the employee’s savings.

The individual employee is responsible for directing how their 401(k) contributions are invested. Plan administrators provide a menu of investment options, consisting of various mutual funds with different risk profiles, from conservative bond funds to more aggressive stock funds. A feature of 401(k) plans is their portability; when an employee leaves their job, they can roll their account balance into their new employer’s 401(k) or an Individual Retirement Account (IRA).

Core Distinctions Between OPERS and 401(k) Plans

The primary distinction lies in the plan type and who assumes the investment risk. An OPERS plan is a defined benefit (DB) plan, promising a specific monthly income for life, with the employer bearing the risk. In contrast, a 401(k) is a defined contribution (DC) plan where the final benefit is a variable account balance dependent on employee-managed investments, placing the risk on the individual.

Coordinating OPERS with Other Retirement Savings

Public employees participating in an OPERS plan often have access to supplemental retirement savings vehicles to enhance their financial security. These accounts allow for personal savings and investment control that a pension plan does not offer. They are designed to work alongside the pension, not replace it, providing an additional layer of retirement income.

A common option available to state and local government employees is a 457(b) deferred compensation plan. Functioning much like a 401(k), a 457(b) allows employees to contribute a portion of their salary on a pre-tax basis into an investment account. These plans have their own contribution limits, separate from any other retirement accounts, allowing public employees to save a substantial additional amount for retirement.

Beyond employer-sponsored options, public employees can also contribute to an Individual Retirement Account (IRA). Depending on their income, they may be able to contribute to either a tax-deductible Traditional IRA or a tax-free Roth IRA. An IRA provides complete control over investment choices and offers another avenue to build a nest egg that is independent of the pension system, offering flexibility and diversification in retirement income sources.