The state should ensure that pension systems are portable, flexible and fair to all teachers.
Colorado only offers a defined benefit pension plan to its teachers as their mandatory pension plan. This plan is not fully portable and does not vest until year five. It also limits flexibility by restricting the ability to purchase years of service. Colorado, however, is commended for offering a 50 percent employer match to vested teachers that withdraw their funds before retirement age and for offering a fully portable supplemental savings plan.
Vesting in a defined benefit plan guarantees a teacher's eligibility to receive lifetime monthly benefit payments at retirement age. Colorado's vesting requirement is five years or age 65 if the service requirement is not met. The state, however, is commended for offering a money purchase benefit for teachers who separate before vesting. This is a desirable feature that offers portability for its teachers. According to a recent report, about 58 percent of employees in Colorado's teacher-covered pension plan vest, meaning that at least 42 percent of employees are eligible to receive a money purchase benefit.
Colorado also offers greater portability to teachers leaving the system than most other states, which is very rare among defined benefit plans. Teachers with five years of service who choose to withdraw their contributions before retirement age are able to take a 50 percent employer match in addition to their contributions and the interest earned (currently 3 percent compounded). Teachers who wait until retirement age may withdraw their contributions, the interest earned, and a 100 percent employer match, or they may follow the traditional benefit formula. Teachers with less than five years of service may receive a money purchase benefit, which is determined by an individual's life expectancy, the value of his/her DB account at time of application, plus a 100 percent match of this balance plus interest. Colorado is commended for this feature because it provides portability and flexibility for its teachers who might leave the system before reaching vesting.
While it would be preferable for the state to offer a 100 percent match earlier in a teacher's career, Colorado is commended for the match it offers vested teachers. Even with this match, however, vested teachers leaving the pension system would have saved only 12 percent of their salary plus interest, while non-vested teachers would have saved only 8 percent plus interest. Both of these levels are below what is conventionally recommended by retirement advisers for individuals not also contributing to Social Security. While Colorado's relatively low mandatory contribution rate allows for flexibility in teachers' retirement savings, it also means that Colorado needs to educate teachers on what happens if they leave the system and encourage savings in other portable supplemental plans. 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 contribution.
Colorado 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. Colorado'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 Colorado with more teaching experience. In addition, the state limits purchase time for approved leaves of absence, which is a disadvantage to any teacher who needs to take a leave for personal reasons such as maternity or paternity care.
Colorado is commended for offering an optional supplementary defined contribution plan and for encouraging participation in this plan through its informative website and materials. Colorado's PERA 401(k) Plan is a voluntary tax-deferred retirement savings program in which teachers are given numerous investment options. Teachers may be able to contribute meaningfully to the optional defined contribution plan because of the reasonable employee contribution rate for Colorado's defined benefit pension plan of 8 percent (see Goal 4-H). There is no guaranteed employer contribution to this plan, however, and it is up to the individual employer to determine whether it will make any contribution.
Colorado Public Employees' Retirement System. Your PERA Benefits: A Summary of the Colorado Pera Defined Benefit Plan, revised April 2015. Aldeman, C. and Rotherham, A. (2014). Friends without Benefits: How States Systematically Shortchange Teachers’ Retirement and Threaten Their Retirement Security, Bellwether Education Partners.
Offer teachers a pension plan that is fully portable, flexible and fair.
Colorado 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 Colorado do not participate in Social Security, they have no fully portable retirement benefits that would move with them in the event they leave the system.
Increase the portability of its defined benefit plan.
If Colorado maintains its defined benefit plan, it should allow teachers leaving the system to withdraw 100 percent of employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience and approved leaves of absence 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 Colorado 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.
Colorado indicated that its plan is a hybrid defined benefit plan. Colorado also noted that a money purchase annuity benefit is earned upon completion of the first month of service and is payable at age 65. Five years is the vesting period for eligibility for the formula benefit, but the money purchase benefit option allows a member to receive a monthly benefit at age 65 with less than five years of service credit. In addition, the state pointed out that all prior years of service in the system may be purchased/reinstated and a member may purchase up to 10 years of service from work outside of the system.
While Colorado's plan does offer more portability than most defined benefit plans, in most respects it operates like a traditional defined benefit plan, and has been categorized as such for 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.