The state should ensure that pension systems are portable, flexible and fair to all teachers.
Alabama only offers a defined benefit pension plan to its teachers as their mandatory pension plan. This plan, however, is not fully portable, does not vest until year 10, and does not provide any employer contribution for teachers who choose to withdraw their account balances when leaving the system. It also limits flexibility by restricting the ability to purchase years of service. The state, however, is commended for offering a fully portable supplemental savings plan.
Teachers in Alabama also participate in Social Security, so they must contribute to the state's defined benefit plan in addition to Social Security. Although retirement savings in addition to Social Security are good and necessary for most individuals, the state's policy results in mandated contributions to two inflexible plans, rather than permitting teachers options for their state-provided savings plans.
Vesting in a defined benefit plan guarantees a teacher's eligibility to receive lifetime monthly benefit payments at retirement age. Non-vested teachers do not have a right to later retirement benefits; they may only withdraw the portion of their funds allowed by the plan. Alabama's vesting at 10 years of service is very late and limits the options of many teachers who leave the system prior to that point.
According to one report, about 40 percent of employees in Alabama's teacher-covered pension plan vest, meaning that 60 percent do not become eligible for a pension and, therefore, can only collect their refundable contributions. Moreover, a more recent report shows that 71 percent of new teachers will receive a benefit whose value exceeds the value of their cumulative contributions to the pension fund. Teachers in Alabama with less than three years of experience who choose to withdraw their contributions upon leaving only receive their own contributions without any interest. Teachers with more than three years of experience receive a portion of credited interest that gradually increases from 50 percent for teachers with 3-15 years of service to a maximum of 80 percent for those with at least 26 years of experience. This means that those who withdraw their funds accrue fewer benefits than what they might have earned contributing to basic retirement savings accounts. Furthermore, teachers who remain in the field of education but enter another pension plan (such as in another state) will find it difficult to purchase the time equivalent to their prior employment in the new system because they are not entitled to any employer contributions.
Alabama also limits teachers' flexibility to purchase years of service. The ability to purchase time is important because defined benefit plans' retirement eligibility and benefit payments are often tied to the number of years a teacher has worked. Alabama's plan allows teachers to purchase time for previous teaching experience, up to 10 years. While better than not allowing any purchase at all, this provision disadvantages teachers who move to Alabama with more teaching experience. In addition, this purchase is not allowed until teachers have 10 years of service in Alabama, which makes the purchase cost much more expensive than if calculated earlier in a teacher's career. The state's plan also allows for the purchase of up to one year for each maternity and paternity leave taken without pay, and this may be purchased in the year after the leave.
Alabama is commended for offering an optional supplementary defined contribution plan, known as RSA-1, which is a deferred compensation plan. This is similar to an IRA account in that teachers pay federal and state income taxes on contributions and investment earnings only when they withdraw the money from their accounts. Because of the low mandatory employee contribution rate to the defined benefit plan of 6 percent (see pension sustainability goal), teachers should be able to also contribute meaningfully to the state's optional defined contribution plan. However, there is no employer contribution to these accounts.
Teachers' Retirement System of Alabama, Tier 2 Member Handbook. Aldeman, C. and Rotherham, A. J. (2014). Friends without Benefits: How States Systematically Shortchange Teachers’ Retirement and Threaten Their Retirement Security, Bellwether Education Partners. Aldeman, C. and Johnson, R. W. (2015). Negative Returns: How State Pensions Shortchange Teachers, Bellwether Education Partners and Urban Institute
Offer teachers a pension plan that is fully portable, flexible and fair.
Alabama should offer teachers for their mandatory pension plan the option of either a defined contribution plan or a fully portable defined benefit plan, such as a cash balance plan. A well-structured defined benefit plan could be a suitable option among multiple plans. As the sole option, however, defined benefit plans severely disadvantage mobile teachers and those who enter the profession later in life. Because teachers in Alabama participate in Social Security, they are required to contribute to two defined benefit-style plans.
Increase the portability of its defined benefit plan.
If Alabama maintains its defined benefit plan, it should allow teachers that leave the system to withdraw the full interest earned by their contributions, as well as an employer match. The state should also allow teachers to purchase their full amount of previous teaching experience upon the first day of employment and decrease the vesting requirement to three years. A lack of portability is a disincentive to an increasingly mobile teaching force.
Offer an employer contribution to the supplemental retirement savings plan.
While Alabama at least offers teachers the option of a supplemental defined contribution savings plan, this option would be more meaningful if the state required employers also to contribute.
Alabama did not respond to repeated requests to review 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.