People ask me what DROP is all of the time. Everyone hears about DROP and there is always much excitement about the DROP program, but many FRS members don't understand what DROP is or how it works. Let's talk about it.
DROP stands for Deferred Retirement Option Program. Choosing to enter the DROP program can give an FRS pension plan member some liquidity to pair with the defined benefit pension plan when they separate from FRS employment. How much your DROP fund is capable of growing today though has changed from in the past. An FRS member has the option to enroll in DROP once they reach full retirement either by age or years of service from an FRS employer. Members will have the option to enroll in DROP for up to 5 years, but there are exceptions to this rule that sometimes allow members to receive extensions to stay within DROP longer. When the member enters the DROP program, their pension benefit calculation stops and no longer continues to collect service credits for the years they are in DROP. This also means that their monthly pension benefit should begin, but because the member is still working, the monthly benefit is held in a tax sheltered retirement account each month while the member remains in the DROP program. This is how your DROP account is funded. DROP basically allows you to start distributions for your pension, but the funds are held in a retirement account so you are able to avoid paying income tax while you continue to work. The account also generates interest on the DROP funds on a monthly basis at an effective rate of 1.3% annually. This is very different from prior to July of 2011 when the effective annual interest rate from DROP was 6.5%. When the FRS member separates from employment and leaves DROP, the member is then able to decide how they would like to distribute the funds from DROP. The member could elect to take a full distribution which would be subject to income tax, or rollover the funds to another retirement account. Another rollover option that many FRS members seem to be unfamiliar with is rolling their DROP funds into the FRS Investment Plan, even though they are separating from FRS employment. If you have questions about joining DROP or what to do when you leave DROP, let us know and one of our financial professionals will be happy to answer all of your DROP questions.