Pension Flexibility: Colorado

Analysis of Colorado's policies

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. However, Colorado 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. Nonvested teachers do not have a right to later retirement benefits; they may only withdraw the portion of their funds allowed by the plan. Colorado's vesting at five years of service limits the options of teachers who leave the system prior to this point.

Colorado does at least offer some portability to teachers leaving the system, which is 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. 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 (see Goal 4-I).  However, teachers with less than five years of service receive only a 50 percent match on contributions and interest made on or before December 31, 2010.  For all contributions after this date, nonvested teachers will receive only their contributions with no match or interest. This means that non-vested teachers who withdraw their funds accrue fewer benefits than what they would have earned had they simply put their contributions in basic savings accounts.

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. However, even with this match, vested teachers leaving the pension system would have saved only 12 percent of their salary (see Goal 4-H), while nonvested teachers would have saved only 8 percent. 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. Further, 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 does not allow teachers to purchase time for approved leaves of absence, which is a tremendous disadvantage, especially 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). However, there is no guaranteed employer contribution to this plan, and it is up to the individual employer to determine whether it will make any contribution.

Citation

Colorado Public Employees' Retirement System, A Summary of the PERA Defined Benefit Plan https://www.copera.org/PDF/5/5-5.pdf

Recommendations for Colorado

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. However, as the sole option, 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 year three. 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. 

State response to our analysis

The Public Employees' Retirement Association of Colorado did not respond to repeated requests to review NCTQ's analyses related to teacher pensions.