The state should ensure that pension systems are portable, flexible and fair to all teachers.
North Dakota 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. The state, however, is commended for offering flexibility to teachers by allowing them to purchase years of service.
Teachers in North Dakota 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. North Dakota's vesting at five years of service for Tier 2 members limits the options of many teachers who leave the system prior to this point. According to a recent report, only 46 percent of employees in North Dakota's teacher-covered pension plan vest, meaning that 54 percent of teachers do not become eligible for a pension and, therefore, can only collect their refundable contributions.
Teachers in North Dakota 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. 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.
North Dakota provides teachers with the 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. North Dakota's plan allows teachers to purchase unlimited time for previous teaching experience and approved leaves of absence. This provision is rare and a great advantage to those who move to North Dakota with teaching experience and those who need to take a leave for paternity or maternity care, or for other personal reasons.
North Dakota Teachers' Fund for Retirement, TFFR Member Handbook, effective July 1, 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.
North Dakota 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. As the sole option, however, defined benefit plans severely disadvantage mobile teachers and those who enter the profession later in life. Because teachers in North Dakota participate in Social Security, they are required to contribute to two defined benefit-style plans.
Increase the portability of its defined benefit plan.
If North Dakota maintains its defined benefit plan, it should allow teachers that leave the system to withdraw employer contributions. 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 North Dakota 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.
North Dakota was helpful in providing information that enhanced this analysis.