The state should ensure that pension systems are portable, flexible and fair to all teachers.
Kentucky 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 five 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.
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. Kentucky's vesting at five years limits the options of teachers who leave the system prior to this point. According to a recent report, about 67 percent of employees in Kentucky's teacher-covered pension plan vest, meaning that 33 percent do not become eligible for a pension and, therefore, can only collect their refundable contributions.
Teachers in Kentucky who choose to withdraw their contributions upon leaving receive their mandatory contribution plus interest, minus medical insurance fund deductions (see pension sustainability goal). This means that those who withdraw their funds accrue fewer benefits than what they might have earned contributing to basic savings accounts. Therefore, teachers leaving the pension system would have saved significantly below the level conventionally recommended by retirement advisers for individuals not also contributing to Social Security.
While Kentucky's contribution rate allows for flexibility in teachers' retirement savings, it also means that the state 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.
Kentucky 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. Kentucky's plan allows teachers to purchase one year of service credit for every two years of earned Kentucky credit (presumably limited to 10 YOS). In addition, teachers with 10 years of service credit may purchase time for up to 10 years of previous teaching experience. While better than not allowing any purchase at all, this provision disadvantages teachers who move to Kentucky with more teaching experience. In addition, the mandatory 2 years of service before purchasing any previous service makes the purchase cost slightly more expensive than if allowed at the start of service. The state's plan also allows for the purchase of up to three years for approved leaves of absence in each 10 year period.
Kentucky Teachers' Retirement System, Comprehensive Annual Financial 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.
Kentucky 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 Kentucky 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 Kentucky maintains its defined benefit plan, it should allow teachers that leave the system to withdraw their full employee contribution plus matching employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience at the start of their employment and 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 Kentucky 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.
Kentucky did not respond to repeated requests to review this analysis.