Pension Flexibility: Louisiana

Analysis of Louisiana's policies

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. Nonvested 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.

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 Goal 4-H), 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. However, there are no employer contributions.

Citation

Teachers' Retirement System of Louisiana Member Handbook, January 2011 http://trsl.org/uploads/File/Brochures/memberhandbook.pdf

Recommendations for Louisiana

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. 

State response to our analysis

Louisiana was helpful in providing NCTQ with facts that enhanced this analysis.

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 TRSL defined benefit plan sets forth a comprehensive retirement program that provides for normal retirement, disability retirement, survivor benefits, potential for retiree permanent benefit increases, and portability through service credit purchase options and reciprocity.

Louisiana contended that the ability to purchase service credit and reciprocal recognition of service credit is an important means of pension portability in TRSL's defined benefit plan. Louisiana, like most other states, permits teachers to purchase service credit for out-of-state teaching. Within Louisiana, TRSL's vast membership coverage and the various recognition and purchase of service credit provisions of the TRSL plan afford members the opportunity for mobility among public and private teaching positions and other public sector employment. TRSL's plan includes in its membership all public elementary and secondary teachers, higher education instructional staff and various other education-related entities. Pursuant to Louisiana law, TRSL recognizes reciprocal service credit from any other Louisiana state, municipal or parochial retirement system and each of those systems recognizes TRSL service credit. Members of Louisiana retirement systems have the option of combining all service credit or transferring service credit from one state, municipal or parochial retirement system to another.

In addition, the state noted that members of TRSL can purchase service credit canceled as a result of withdrawal of contributions, teaching service while on leave of absence without pay, teaching service in any nonpublic college or university or school in Louisiana, teaching service in any United States dependent school, substitute teaching service and military service. While on sabbatical leave, TRSL members are considered to be on active service and receive service credit that corresponds to the time period for which they are on sabbatical leave, when full contributions are made.

Louisiana maintained that traditional defined benefit plans have a proven track record of attracting and retaining teachers and are more efficient in providing a target level of retirement income than defined contribution plans. A guaranteed lifetime income provides retirees with financial security. As has been demonstrated by recent economic downturns, individual retirement accounts have experience unprecedented declines in their value. TRSL believes that Louisiana's teachers should not become employees who must rely solely on defined contribution plans to provide their retirement.

Last word