GovernmentFor millions of public sector employees—from federal law enforcement agents to public school teachers—retirement planning looks quite different from the private sector. Government retirement plans offer valuable pension-style benefits, unique contribution structures, and varying levels of employer involvement. But understanding these plans can be complex without the right guidance.
At The Advisor Group, we specialize in retirement plan administration for both private and public employers. In this blog, we break down the different types of government retirement plans, their benefits, and how they compare—so you can make informed decisions for your organization or career.
What Are Government Retirement Plans?
Government retirement plans are employer-sponsored pension or savings vehicles designed specifically for public sector employees. These plans typically fall under one of the following categories:
Defined Benefit Plans (like pensions)
Defined Contribution Plans (like 403(b) and 457 plans)
Hybrid Plans (combining elements of both)
Unlike private-sector plans governed by the Employee Retirement Income Security Act (ERISA), many government retirement plans are exempt from ERISA—though they still maintain fiduciary responsibilities and require diligent oversight.
🔗 Learn how we support ERISA-exempt plans with compliant fiduciary services.
1. Defined Benefit Plans (Pensions)
Overview
The cornerstone of many government retirement systems is the defined benefit plan, or traditional pension. Under this model, employees receive a guaranteed monthly benefit based on a formula that typically includes:
Years of service
Final average salary
Multiplier or accrual rate
Key Features
Employer-funded: Contributions are primarily made by the employer.
Guaranteed income: Benefits are paid for life, reducing longevity risk.
Vesting: Full benefits typically require 5 to 10 years of service.
📎 For a deep dive into how these plans work, see the National Association of State Retirement Administrators (NASRA) overview.
Pros and Cons
| Pros | Cons |
|---|---|
| Lifetime income | Lack of portability |
| Strong employer contributions | May not keep pace with inflation |
| Ideal for long-term employees | Often underfunded |
2. Federal Employees Retirement System (FERS)
FERS is the most widely used federal retirement system and includes three components:
Basic Benefit Plan (Defined Benefit)
Social Security
Thrift Savings Plan (TSP) – a 401(k)-style defined contribution plan
FERS Benefits
Government contributes 1% of basic pay to TSP automatically.
Offers full pension after meeting age and service requirements.
Participants can make tax-deferred or Roth contributions to TSP.
🔗 See our blog on the FERS Retirement Pension Explained for eligibility rules and payout structure.
3. Thrift Savings Plan (TSP)
The TSP is similar to a 401(k) and available to federal employees, offering:
Tax-deferred or Roth contributions
Employer match up to 5%
Low-cost investment options
TSP’s simplicity and low fees make it one of the most efficient defined contribution plans available.
📎 Explore TSP investment options and calculators at TSP.gov.
4. 403(b) Plans for Public Schools & Nonprofits
A 403(b) plan is a tax-sheltered annuity used primarily by:
Public school districts
Universities
Certain nonprofit organizations
Highlights
Employees can contribute up to $23,000 in 2025 (plus catch-up if 50+)
Some plans offer Roth options
May include employer matching, though less common in public education
🔗 For administrators, our 403(b) plan services help streamline compliance, testing, and documentation.
5. 457(b) Deferred Compensation Plans
Used by state and local governments, 457(b) plans are non-qualified deferred compensation plans with key distinctions:
No 10% early withdrawal penalty (unlike 401(k)/403(b))
Separate contribution limit from 403(b)
Often offered alongside other plans
In 2025, the limit is $23,000, with an additional $7,500 catch-up for employees aged 50 and over.
Key Benefit
Employees nearing retirement can use a double limit catch-up rule—allowing up to $46,000 if under-contributed in prior years.
📎 Read more about 457(b) rules and benefits on the IRS website.
6. Comparing Public vs. Private Sector Plans
| Feature | Government Plans | Private Sector Plans |
|---|---|---|
| Primary Plan Type | DB + DC | Mostly DC |
| ERISA Applicability | Mostly exempt | Fully governed |
| Investment Options | Often limited | Broad, self-directed |
| Portability | Lower | Higher |
| Vesting | Slower | Varies by plan |
While private-sector plans focus on portability and employee responsibility, government plans aim for stability and longevity, rewarding career service.
7. Hybrid Retirement Plans
Many states are adopting hybrid plans that combine:
A modest pension (DB)
A defined contribution plan like a 401(k)
This model offers sustainability while still providing some level of guaranteed benefit.
Examples include:
Virginia Retirement System (VRS) Hybrid Plan
Michigan Public School Employee Retirement System (MPSERS) hybrid tier
8. Cash Balance Plans in Government Settings
Though more common in private practice (like law firms), some government employers offer cash balance pension plans, which:
Provide a notional account balance
Grow through pay credits and interest credits
Are technically DB plans, but resemble DC plans in structure
🔗 Learn more in our blog: What Are Cash Balance Pension Plans? A Complete Guide
9. Contribution Limits Across Plan Types (2025)
| Plan Type | Employee Contribution Limit | Employer Contribution | Catch-Up (Age 50+) |
|---|---|---|---|
| 403(b) | $23,000 | Up to 25% of salary | $7,500 |
| 457(b) | $23,000 | N/A | $7,500 |
| TSP | $23,000 | Up to 5% match | $7,500 |
Understanding the contribution landscape helps maximize savings across plans.
10. Challenges in Administering Government Retirement Plans
➤ Evolving Legislation
State and federal laws frequently change, impacting contribution limits, plan structures, and fiduciary duties.
➤ Fiduciary Oversight
Even though many plans are ERISA-exempt, fiduciary principles still apply. Employers must act prudently and in the best interest of participants.
🔗 Our fiduciary consulting services offer proactive plan reviews, governance support, and compliance audits.
➤ Plan Coordination
Many employees are eligible for multiple plans (e.g., 403(b) + 457), which requires careful coordination and communication to avoid over-contributions.
11. State-Sponsored IRA Programs
Several states have introduced auto-enroll IRA programs for public and private workers without access to employer-sponsored retirement plans.
Examples:
CalSavers (California)
OregonSaves
Illinois Secure Choice
📎 Get an overview of these programs from the Georgetown Center for Retirement Initiatives.
12. How We Help Public Employers and School Districts
At The Advisor Group, we support public sector plan sponsors with:
Full-service plan administration
Recordkeeper and custodian coordination
Plan document preparation and updates
Participant education
Nondiscrimination testing (for plans that require it)
🔗 Discover our retirement plan administration services tailored to government employers.
Conclusion
Government retirement plans offer some of the most robust and secure options available—but only when they are properly administered, updated, and understood. Whether you’re navigating FERS, coordinating 403(b) and 457 plans, or managing a hybrid system, choosing the right administration partner ensures your plan meets both its fiduciary obligations and participant expectations.
The Advisor Group is here to help simplify the complex, ensuring your public sector retirement plan is built to last.
Phone: 361-271-1211
Email:service@admin316.com
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Hours: Monday – Friday, 8:00 AM –5:00 PM CST