If you work for a Washington state agency, a school district, or a city that uses Plan 3 (TRS 3, PERS 3, or SERS 3), you already know your retirement plan looks different from the older Plan 2. Plan 3 splits your retirement into two pieces: a small guaranteed pension and a self-directed investment account that you help build. That split sounds great on paper.
But after years of talking with Plan 3 members, I’ve noticed the same three complaints come up again and again. In this post, I’ll walk through each drawback, explain why it matters, and show you a real-world example of how it can affect your retirement paycheck.
What Makes Plan 3 Different in the First Place
Think of Plan 3 like a two-legged stool instead of a three-legged one. One leg is a small guaranteed pension paid by the state. The other leg is an investment account that you fund with your own contributions, invested in the market. Plan 2 members get a bigger guaranteed pension and no investment account. Plan 3 members trade some of that guarantee for more control and, hopefully, more growth. That trade sounds fair, but it comes with real strings attached. Let’s go through them one at a time.
Drawback #1: You Can’t Change Your Contribution Rate
When you were first hired into Plan 3, you picked a contribution rate, or you got defaulted into one automatically. Maybe that was 5%. Maybe it was higher. Here’s the catch: once you make that choice, you are locked into it for as long as you stay with that same employer. There is no yearly window to bump it up, even if you get a raise or decide you want to save more aggressively.
The only time you get to change your rate is if you switch employers. When that happens, Washington gives you a 90-day window to pick a new contribution rate. Once that window closes, you’re locked in again until your next job change. A lot of members don’t realize this until 10 or 15 years have gone by, and by then, they’ve missed out on years of higher contributions and the growth those extra dollars could have earned.
Compare that to a typical 401(k) in the private sector, where you can usually change your contribution percentage any time you want, sometimes even every paycheck. Plan 3 simply doesn’t work that way, and that rigid structure surprises a lot of people.
Drawback #2: The Investment Choices Are Limited, and Many People Are Stuck in an Aggressive Default
Here’s a number that surprises most Plan 3 members: about 62% of people in Plan 3 are still sitting in the WSIB Total Allocation Portfolio, simply because that’s where they were defaulted and they never moved their money. If you were hired before 2011, WSIB was your automatic default fund.
The problem is that WSIB is an aggressive fund. It holds private equity and real estate alongside stocks and bonds. When markets are doing well, that can help your account grow. But when markets fall, this fund can lose a significant amount of value, and it doesn’t get more conservative as you get older.
A lot of members were caught off guard by this back in 2008, when the fund lost a large chunk of its value right as some people were getting close to retirement. Many had simply assumed the state was managing their risk for them. It wasn’t. In Plan 3, you are in charge of your own account, whether you realize it or not.
If you were hired after 2011, your default is different. You get defaulted into a target date fund instead, which lines up with the year you’ll turn 65. As you get closer to that age, the fund automatically shifts more of your money into bonds, making it more conservative over time. This is a smarter default for most people, since it reduces your risk of a big loss right before you retire. That said, even some target date funds carry more risk than members expect, so it’s still worth checking what’s inside yours.
Beyond the default option, Plan 3 gives you seven self-directed fund choices, ranging from cash to emerging markets, plus a large-cap fund, a blended fund, a small-cap value fund, and an international fund. That might sound like plenty, but compare it to what you’d find in a typical private-sector 401(k), where you often get a dozen or more options across multiple fund companies, including mid-cap funds and small-cap growth funds. Plan 3 doesn’t offer either of those.
That narrower lineup makes it harder to build a properly diversified portfolio. When you compare the target date funds inside Plan 3 to similar funds at a place like Vanguard or Fidelity, the Plan 3 versions have historically underperformed.
Drawback #3: Only Half Your Retirement Income Is Guaranteed
This is the drawback that surprises people the most. In Plan 3, your guaranteed pension only builds at 1% per year of service, which is half the accrual rate of Plan 2. That means your guaranteed monthly check in retirement is roughly half of what a Plan 2 member with the same years of service would receive.
The other half of your retirement income is supposed to come from your investment account. And that account’s value depends on three things: how much you contributed, how long you worked, and how the market performed while your money was invested, including the order in which the gains and losses happened. That last part, often called “sequence of returns,” matters more than most people expect.
Here’s the mindset shift: retirement isn’t really about the size of your account balance. Whether you have $300,000 or $800,000 in your Plan 3 investment account, it’s still money sitting in the stock market, and the market doesn’t stop moving just because you retired. You’ll still experience gains and losses after you stop working, and you’ll need to manage withdrawals carefully so you don’t run the account dry.
If the market drops significantly right after you retire, pulling out your normal withdrawal amount could force you to sell investments at a loss. That can permanently shrink how much income that account can support later.
Think about it this way. Today, you go to work and you know exactly what you’ll earn each month. That predictability lets you budget with confidence. Now imagine your employer told you that only half your paycheck was guaranteed from now on, and the other half would depend on how the stock market performed that month. Most people wouldn’t be comfortable with that arrangement. Yet that’s essentially how Plan 3 income works once you retire.
A Worked Example: Two Plan 3 Members, Same Salary, Different Outcomes
Let’s make this concrete. Imagine two Plan 3 members, both retiring after 25 years of service with a final average salary of $70,000. Both have the same 1% guaranteed pension formula, so both start with the same guaranteed base. The difference comes from their investment accounts.
| Member | Guaranteed Pension (1% x 25 yrs x $70,000) | Investment Account at Retirement | Estimated Annual Income from Account (4% withdrawal) | Total Estimated Annual Income |
|---|---|---|---|---|
| Member A (stayed in WSIB default, market dropped early in retirement) | $17,500 | $180,000 | $7,200 | $24,700 |
| Member B (reviewed and adjusted investments, steady growth) | $17,500 | $320,000 | $12,800 | $30,300 |
Both members have the exact same guaranteed pension. The entire $5,600 difference in yearly income comes from how their investment account was managed over 25 years and how the market behaved right around the time they retired. That’s the real weight of Drawbacks #2 and #3 working together. The guaranteed half of your income can’t be improved much on your own, but the investment half can be, if you understand what you’re working with.
So What Can You Actually Do About This?
None of this means Plan 3 is a bad retirement plan. It has real benefits too, including portability and more control than Plan 2 offers. But knowing these three drawbacks helps you plan around them instead of being surprised by them later. A few practical steps:
- Check your DRS account today to see which fund your investment dollars are actually sitting in. Don’t assume you know.
- If you’re still in the WSIB default and getting close to retirement, understand the level of risk you’re carrying and whether it still fits your timeline.
- Since you can’t change your contribution rate outside of a job change, make sure any additional retirement savings (like a Roth IRA or DCP account) are pulling their weight elsewhere.
- Build a withdrawal strategy for your investment account before you retire, not after, so a bad market year right at the start of retirement doesn’t permanently shrink your income.
If you’d like help working through your specific numbers, you can schedule a personal meeting and we’ll walk through your DRS statement together.
Frequently Asked Questions
Can I switch out of Plan 3 and into Plan 2?
Generally, no. Once you’re in Plan 3, you stay in Plan 3 for that membership. Some very specific transfer windows have existed in the past for certain groups, but for most members, the plan choice made at hire is permanent.
How do I find out which fund my Plan 3 money is invested in?
Log into your DRS online account. Your current fund allocation and balance are listed there. If you’ve never logged in or checked, that’s the very first step to take.
Is the WSIB fund always a bad choice?
Not necessarily. It can make sense for someone who is decades away from retirement and comfortable riding out market swings. It becomes more concerning the closer you get to retirement, since it doesn’t automatically become more conservative the way a target date fund does.
Why can’t I just increase my contribution rate whenever I want?
This is simply how Washington structured Plan 3. Your rate is locked in at hire (or at your last employer change) and can only be revisited during a job change, within a 90-day window.
Does Plan 3 apply the same way to TRS, PERS, and SERS members?
Yes. TRS 3, PERS 3, and SERS 3 all share the same basic two-part structure: a 1% guaranteed pension plus a self-directed investment account. The specific dollar amounts differ based on your salary and years of service, but the drawbacks covered in this post apply across all three.
P.S. If you’re a Plan 3 member and you’ve never actually logged into your DRS account to see which fund your money sits in, that’s worth doing this week. It only takes a few minutes, and it’s the first step toward making sure your investment account is actually working the way you think it is.
