The state should ensure that pension systems are portable, flexible and fair to all teachers.
Louisiana 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.
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. Louisiana's vesting at five years limits the options of teachers who leave the system prior to this point. According to a recent report, about 56 percent of employees in Louisiana's teacher-covered pension plan vest, meaning that 44 percent do not become eligible for a pension and, therefore, can only collect their refundable contributions.
Teachers in Louisiana who choose to withdraw their contributions upon leaving only receive their own contributions with no interest. 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 only 8 percent of their salary (see pension sustainability goal), which is significantly below the level conventionally recommended by retirement advisers for individuals not also contributing to Social Security. While Louisiana'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. 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.
Louisiana has some limits on 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. Louisiana's plan allows teachers to purchase time for all previous teaching experience, which is more generous than most states'. The state's plan also allows for the purchase of approved leaves of absence but only one year of leave for each five years of service in Louisiana. This may be a disadvantage to those teachers who need to take more leave for personal reasons, such as maternity or paternity.
The state is commended for offering a fully portable supplemental savings plan. Teachers can participate in the Louisiana Deferred Compensation Plan, a 457 retirement plan. There are no employer contributions, however.
Louisiana Teachers' 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.
Louisiana 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 Louisiana 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 Louisiana maintains its defined benefit plan, it should allow teachers that leave the system to withdraw their employee contribution plus matching employer contributions and interest. The state should also remove restrictions to purchasing 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 Louisiana at least offers teachers the option of a supplemental defined contribution savings option, this option would be more meaningful if the state required employers also to contribute.
Louisiana disagreed with the conclusion that a pension option, like a defined contribution plan, should be the primary pension plan for Louisiana's K-12 teachers. It is the state's position that the Teachers' Retirement System of Louisiana's (TRSL) traditional defined benefit plan should remain as the retirement plan option available to Louisiana's K-12 teachers.
The state maintained that the TRSL Defined Benefit Plan for K-12 teachers in Louisiana provides teachers with many benefits, including, but not limited to: a guaranteed lifetime income to retirees and irreplaceable financial security; more effective reduction of different types of risk for employees (investment risk, longevity risk, inflation risk, contribution risk, leakage risk, disability risk, survivor risk, etc.); more income for career employees, motivating employees to continue in service; easy understandable relationship to working pay; ability to have service credit reciprocated or to purchase service credit; and opportunities for permanent benefit increases after retirement.
The state mentioned that Louisiana's defined benefit plan for teachers also plays a critical role in helping employers recruit qualified, productive teachers. It provides school districts with stability in their workforce as they are able to retain experienced teachers.
Defined benefit plans offer proven advantages for teachers and employers. In comparison, defined contribution plans have some obvious shortcomings. There are two primary factors to consider when determining a retirement plan's practicality - does it provide an adequate benefit, and is it cost effective? Because TRSL members cannot participate in Social Security, having a retirement benefit tied to fluctuations in the market would likely not provide the same level of retirement security as the defined benefit plan.
Louisiana contended that with respect to the cost-effectiveness of the defined benefit plan, the normal cost for employers, or the cost to provide the accruing benefit for active members, is quite reasonable. [The National Association of State Retirement Administrators (NASRA) found that the national median employer normal cost is 4.2% of salary while TRSL employers will pay 4.1724% (aggregate rate) for FY 2016-17]. NASRA projects that this contributes to a modest 71.4% income replacement for Louisiana public school teachers who retire with 30 years of service. In comparison, a recent report* by the Bureau of Governmental Research (BGR), found that employers would have to contribute 10% of salary per active member to a 401(k)-type retirement account to provide an equivalent retirement benefit (70% income replacement). [BGR also found that teachers would have to contribute 8-10% of salary to the retirement account to meet the 70% income replacement, for a total of 18%-20%.] This would be paid in addition to any required payments toward system debt (unfunded accrued liability).
In addition, the state noted that while it is true that state law does not offer a fully portable plan for K-12 teachers, since 1990, it has offered a defined contribution plan, called the Optional Retirement Plan (ORP), to eligible higher education members. However, data has shown that where educators have the choice, they are choosing to enroll in the defined benefit plan, trading portability for retirement security. First-time enrollment in the ORP has steadily declined, especially since the economic downturn. In 2015, first time enrollment in the ORP was 32% while 68% of new hires in higher education chose to enroll in the defined benefit plan.
With regard to plan portability, NCTQ correctly acknowledges Louisiana's generous service credit purchase provisions as a critical means of pension portability in TRSL's defined benefit plan. Louisiana's teachers can purchase credit for in-state (public or private), out-of-state (public) teaching service, or other public sector employment. TRSL also recognizes reciprocal service credit from any other Louisiana state, municipal, or parochial retirement system and vice-versa. In addition, members of TRSL can purchase service credit canceled as a result of withdrawal of contributions or for time periods for which they are on sabbatical leave, when full contributions were made.
And, while NCTQ recommends decreasing the vesting period from the current 5-year vesting requirement, TRSL notes that this is the median number of years needed for full vesting in teacher pension systems in all states.
Teachers not covered by Social Security do have to be particularly thoughtful regarding their retirement savings plan; that does not mean they cannot benefit from a fully portable and flexible savings plan. In fact, teachers not covered by Social Security are in even more need of a portable plan because if they move out of state or to a different profession at an early stage in their career, they are left with little savings for retirement.
Defined contribution plans can be structured to have many of the benefits of defined benefit plans, but with the added benefits of portability and flexibility to attract new individuals to the profession and to treat all teachers fairly for each year of service, not to mention less stress to states' financial health. Plans can be structured as cash balance plans that allow the employer to maintain the investment risk and to include benefits such as disability and survivor coverage. Teachers' individual accounts can be invested in statewide, professionally managed funds to align their earnings and losses with other statewide plans, such as a defined benefit plan. Increased participation in defined contribution plans may also result in lower fees more commensurate with defined benefit plans. Teachers must receive proper education on topics such as longevity risk, tax implications and annuity options. The state may also consider enrolling its teachers in Social Security to give them full portability.
Defined benefit plans do provide retirement security to long-time teachers, but at a great cost both in terms of actual dollars spent and the commitment of those dollars to the pension system rather than other compensation strategies that may aid in recruitment and retention. The benefits are so back loaded and tied to longevity that the dollars spent on retirement are often not valued because they are not seen by potential employees. Many individuals may never enter the profession if they know they may not be able to dedicate 25 or more years within one system because they can receive more balanced compensation in a different sector. Teachers who move between states, while still dedicating their life to teaching, receive far less in retirement benefits even though they educated just as many students for just as long as teachers in a single state for their entire career. Further, our systems need to attract highly effective teachers who can produce great results, especially in high-needs schools, whether or not they are prepared to make a career-long commitment or only teach for shorter periods of time. A defined benefit pension system does not grant shorter-term teachers the same pension wealth per year of teaching as a teacher who was able to teach longer in a different assignment.
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.