The state should ensure that pension systems are portable, flexible and fair to all teachers.
Nevada only offer a defined benefit pension plans 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.
Nevada offers two funding methods for its defined benefit plan: the Employer Pay Contribution Plan (ERPaid) and the Employee/Employer Contribution Plan (EES/ERS). Local districts choose between the two options, with most districts electing to participate in ERPaid. In the ERPaid plan, the employer pays the entire contribution to the retirement system, with teachers contributing through a salary reduction or in lieu of a pay increase. In the EES/ERS plan, teachers contribute half of the mandatory pension rate through a payroll deduction, and the employer pays the other half.
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. Nevada's vesting at five years of service limits the options of many teachers who leave the system prior to this point. According to a recent report, 55 percent of employees in Nevada's pension plan vest, meaning that 45 percent of employees do not become eligible for a pension and, therefore, can only collect their refundable contributions.
Teachers in the ERPaid plan do not make direct contributions to the system, so they are not accumulating any savings in a personal account. Those teachers, therefore, may not withdraw any funds when they leave the system. Vested teachers will receive their benefit payments later, but non-vested teachers who leave are not entitled to any funds and will have accumulated no mandated retirement savings at all because they do not participate in Social Security. In addition, salary increases may have been diminished during their tenure to pay for the pension system.
Teachers in the EES/ERS plan who choose to withdraw their contributions upon leaving will receive only their own contributions. This means that those who withdraw their funds accrue fewer benefits than they would have earned contributing to basic savings accounts. Therefore, teachers leaving the pension system would have saved only 14.50 percent of their salary (see pension sustainability goal), which is below the level conventionally recommended by retirement advisers for individuals not also contributing to Social Security. While Nevada's mandatory 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.
Nevada 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. Nevada's plan allows teachers with five years of service credit to purchase time for previous teaching experience, up to five years. While better than not allowing any purchase at all, this provision is less than most states' and disadvantages teachers who move to Nevada with more teaching experience. In addition, the state's plan does not allow for the purchase of approved leave of absence for maternity and paternity reasons, which is a disadvantage for teachers.
Public Employees' Retirement System, Summary Plan Description for Regular Members Enrolled on or after 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.
Nevada 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 Nevada 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 Nevada maintains its defined benefit plan, it should allow all teachers that leave the system to withdraw their employee contribution with full interest plus matching employer contributions. Teachers in the ERPaid plan should be credited with their portion of the contribution they make through salary reductions or other means. The state should also allow teachers to purchase their full amount of previous teaching experience and 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 a fully portable supplemental retirement savings plan.
If Nevada 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.
Nevada did not respond to repeated requests to review this analysis.
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.