The state should ensure that pension systems are portable, flexible and fair to all teachers.
In 2010, Iowa signed a law, House File 2518, that changes rules to its retirement plans for public employees, including teachers. Notably, it raised the vesting requirement from four years to seven years for teachers not vested by July 1, 2012.
Iowa only offers a defined benefit pension plan to its teachers as their mandatory pension plan. This plan is not fully portable, does not vest until year seven, and limits any employer contribution for teachers who choose to withdraw their account balances when leaving the system. The state is commended, however, for offering full flexibility for purchasing time.
Teachers in Iowa 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. Iowa's current vesting at seven years of service is later than most states' requirements and limits the options of teachers who leave the system prior to this point. According to a recent report, about 38 percent of employees in Iowa's teacher-covered pension plan vest, meaning that 62 percent do not become eligible for a pension and, therefore, can only collect their refundable contributions.
Iowa does at least offer some portability to vested teachers leaving the system, which is rare among defined benefit plans. Non-vested teachers who choose to withdraw their contributions upon leaving only receive their own contributions plus interest. This means that those who withdraw their funds accrue no benefits beyond what they might have earned had they simply put their contributions in basic savings accounts. Once vested, teachers who withdraw their contributions also receive an employer match of one-thirtieth of their years of service plus interest (e.g., teachers with 10 years of experience would receive a 33 percent employer match). While it would be preferable for the state to offer a 100 percent match and allow employer contributions to teachers with less than four years of experience, Iowa is commended for offering at least some match, which is very rare among public defined benefit plans. Teachers, however, who leave with no match or a small match and 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.
Iowa is commended for offering full flexibility for teachers 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. Iowa's plan allows teachers to purchase an unlimited amount of previous teaching experience, approved leaves of absence and an additional five years of "air time" for any reason. In addition, teachers receive free credit for any leaves approved under the Family Medical Leave Act. These provisions are very advantageous for teachers who move to Iowa with teaching experience and those who need to take personal leaves, such as maternity or paternity leave.
Iowa Public Employees Retirement System, Actuarial Valuation Report as of June 30, 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.
Iowa 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 Iowa participate in Social Security, they are required to contribute to two defined benefit-style plans.
Increase the portability of its defined benefit plan.
If Iowa maintains its defined benefit plan, it should allow all teachers that leave the system to withdraw a portion of employer contributions and increase that portion to 100 percent for vested teachers. The state should also decrease the vesting requirement to year three. A lack of portability is a disincentive to an increasingly mobile teaching force.
Offer a fully portable supplemental retirement savings plan.
If Iowa maintains its defined benefit plan, the state should at least offer teachers the option of a fully portable supplemental defined contribution savings plan, with employers matching a percentage of teachers' contributions.
Iowa 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.