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New DROP Policy - Crediting of Interest
Earlier this year, the LAFPP Internal Audit Section (IAS) conducted an audit of the Member Benefit Payment Process to ensure pension benefits are being accurately communicated, calculated, and disbursed in accordance with the Los Angeles City Charter and Administrative Code. The IAS presented its findings to the Audit Committee and Board of Fire and Police Pension Commissioners on July 7, 2011 and July 21, 2011, respectively.
The audit recommendations included a revision to the methodology used to compute interest on DROP accounts to ensure that interest is properly credited in accordance with finance fundamentals. The prior methodology calculated interest on DROP payments prior to the payment actually being deposited to the DROP account. Other recommendations included designating semi-annual dates for the crediting of interest to DROP accounts and adoption of a policy for the crediting of interest for participants exiting DROP between these semi-annual dates.
Staff carefully reviewed the proposed changes and shared them with labor representatives prior to the Board’s adoption of the policy on August 4, 2011. The policy establishes the following:
- Interest will be earned at a rate of 5% compounded annually. That is, after 12 DROP payments have been deposited in your account.
- Interest will be calculated each month using a monthly factor of .004167 (1/12 of 5%), applied to the prior end of month inception–to-date deposits balance.
- Interest will be credited to member accounts on June 30 and December 31.
- If a member exits DROP between the semi-annual interest-crediting dates, his/her account will be credited with the monthly interest earned as of the exit date (interest is not prorated for any period less than a full month).
These changes have now been programmed into LAFPP’s pension administration system, OnPoint. DROP participants will receive a revised copy of their semi-annual DROP statement (if applicable) which will incorporate the revised interest calculation and reflect the change in reporting from a monthly to semi-annual basis. An option is now available to view detailed monthly DROP balance information through our Employee Self Service option. If you have questions regarding these changes, please contact the Retirement Services Section at (213) 978-4495.
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