The state should ensure that pension systems are portable, flexible and fair to all teachers.
Mississippi 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 eight, 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. However, the state is commended for offering a fully portable supplemental savings plan.
Teachers in Mississippi 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. Nonvested teachers do not have a right to later retirement benefits; they may only withdraw the portion of their funds allowed by the plan. Mississippi's vesting at eight years of service is very late and limits the options of teachers who leave the system prior to this point.
Teachers in Mississippi 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. 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.
Mississippi 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. Mississippi's plan allows teachers to purchase time for previous teaching experience, up to five years. While better than not allowing any purchase at all, this is less than most states' and this provision disadvantages teachers who move to Mississippi with more teaching experience. The state's plan also does not allow teachers to purchase time for approved leaves of absence, except for professional leave, which is a tremendous disadvantage to any teacher who needs to take a leave for paternity or maternity care, or for other personal reasons.
The state is commended for offering a fully portable supplemental savings plan. Teachers can participate in the Mississippi Deferred Compensation Plan & Trust (MDCPT), a 457 retirement plan. However, there are no employer contributions.
Offer teachers a pension plan that is fully portable, flexible and fair.
Mississippi 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 Mississippi participate in Social Security, they are required to contribute to two defined benefit-style plans.
Increase the portability of its defined benefit plan.
If Mississippi maintains its defined benefit plan, it should allow teachers that leave the system to withdraw employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience, allow the purchase of parental leaves, 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 Mississippi 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.
Mississippi recognized the factual accuracy of this analysis. The state added that any statements about what the plan should offer to its participants are a matter of opinion and are best addressed by state policy makers.
Regarding the defined benefit plan as the primary source of retirement security, Mississippi asserted that the Public Employees' Retirement System (PERS) assets are professionally managed with an asset allocation that calls for prudent, long-term investing so that it can provide a steady, predictable retirement income to the state's retired workers, including retired educators, during good and bad markets. Defined benefit plans like PERS have been found to be the most cost effective way to administer retirement plans and to provide guaranteed retirement security for the retired workers of the state. In fact, according to the National Institute on Retirement Security a defined benefit plan can deliver the same level of retirement benefits at almost half the cost of a defined contribution plan. Hence, defined benefit plans should remain an integral part of retirement income security in an increasingly uncertain world because they offer employers and employees the best bang for the buck.
Additionally, while employee contributions are "picked-up" by the employer and tax deferred at that time, these contributions are held for the employee and paid interest at the rate of 3-1/2 percent annually. Upon termination, these funds are portable and may be rolled into an IRA or other tax-deferred vehicle.
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. 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. NCTQ contends that the positive aspects of defined contribution plans outweigh any remaining efficiency differences with defined benefit plans.
Even with professional management and the efficiencies that defined benefit plans provide, Mississippi's plan is less than two-thirds funded and requires a combined contribution of over 20 percent of payroll (see Goal 4-H). This does not provide security for the state, its taxpayers or its future retirees.