The state should ensure that pension systems are portable, flexible and fair to all teachers.
Alaska provides a defined contribution pension plan for teachers. As of July 1, 2006, Alaska closed its defined benefit plan to anyone hired after this date, and its defined contribution plan is the only one available to new teachers. Its current plan is fully portable, flexible and fair to all workers.
Vesting in a defined contribution plan entitles teachers to permanent rights to their own contributions and any available employer contributions. Teachers in Alaska vest immediately in their own contributions plus earnings from investments. They vest in employer contributions based on the following schedule: 25 percent after two years of service, 50 percent after three years, 75 percent after four years and 100 percent after five years. This means that after three years, the vesting point recommended by NCTQ, teachers earn half of their employer accounts (equal to 3.5 percent of salary plus gains or losses from investments). While ideally teachers would be entitled to their full employer contribution at this point, Alaska's sliding scale is a reasonable compromise.
State of Alaska Teachers’ Retirement System, Actuarial Valuation Report as of June 30, 2015.
Maintain its fully portable, flexible and fair pension system.
Alaska should maintain its defined contribution system and work diligently to educate teachers about their investments, especially because teachers in Alaska do not contribute to Social Security and may more heavily depend on their employer pension than other retirees.
Alaska was helpful in providing information that enhanced this analysis.
Anachronistic features of teacher pension plans disadvantage teachers early in their careers. Nearly all states continue to provide teachers with a defined benefit pension system, an expensive and inflexible model that neither reflects the realities of the modern workforce nor provides equitable benefits to all teachers. To achieve the maximum benefits from such a plan, a teacher must begin and end his or her career in the same pension system. Teachers who leave before vesting—which takes as long as 10 years in some states—are generally entitled to nothing more than their own contributions plus some interest. This approach may well serve as a retention strategy for some, but on a larger scale it fails to reflect the realities of the current workforce. At present, the United States is experiencing growth in school-age populations in some states, while other states are experiencing a decline. The nation's workforce needs to be able to respond to these changes. The current workforce is increasingly mobile, with most entering the workforce expecting to change jobs many times. All workers, including teachers, may move to jobs in other states with no intention of changing careers. To younger teachers in particular, a defined benefit plan may seem like a meaningless part of the compensation package and thus fail to attract young talent to the profession. A pension plan that cannot move across state lines and that requires a long-term commitment may not seem like much of a benefit at all.
There are alternatives. Defined contribution plans are fair to all teachers at all points in their careers. These plans are more equitable because each teacher's benefits are funded by his or her own contributions plus contributions from the employer specifically on the individual employee's behalf. This is fundamentally more equitable than defined benefit plans, which are generally structured to require new teachers to fund the benefits of retirees. Moreover, defined contribution plans are inherently portable and give employees flexibility and control over their retirement savings. However, it must be noted that defined benefit plans can also be portable and fair, so long as they are structured as cash balance plans or plans that permit the withdrawal of employer contributions.