The state should ensure that pension systems are portable, flexible and fair to all teachers.
Ohio offers all teachers the option of a defined contribution plan, a defined benefit plan or a combined plan. The state provides new employees with very informative literature describing the advantages, disadvantages and estimated benefit payouts for each type of plan. Because teachers in Ohio do not participate in Social Security, financial education about their pension plans may be particularly important. New teachers must choose one plan within 180 days of their first paycheck. Those who do not choose a plan by that date are automatically enrolled in the defined benefit plan. Teachers who select the defined contribution plan or the combined plan must make their decision permanent in their fifth year of teaching; if they do not explicitly make their original choice permanent, their defined contribution accounts are automatically closed and they are enrolled in the defined benefit plan. Teachers enrolled in the defined benefit plan, either by choice or by default, may not switch to other plans.
In addition to the choices for a primary pension plan, Ohio also offers a fully portable supplemental savings 457 plan, the Ohio Deferred Compensation Plan. Teachers can participate in this plan in addition to a 403(b) plan, and contribution limits on the 457 plan do not affect the limits of a 403(b) plan. However, there is no employer contribution.
Ohio's defined benefit plan is not fully portable and does not vest until year five. It also limits flexibility by restricting the ability to purchase years of service. Ohio, however, is commended for offering a 50 percent employer match to employees in the defined benefit plan who withdraw their funds before retirement age.
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 their refundable contributions. Ohio's defined benefit plan vests at five years of service, limiting the options of teachers who leave the system prior to this point. According to a recent report, only 34 percent of employees in Ohio's teacher-covered pension plan vest, meaning that 66 percent of teachers do not become eligible for a pension and, therefore, can only collect their refundable contributions.
Non-vested teachers in the defined benefit plan who stop teaching in Ohio may only withdraw their contributions plus refundable interest. Teachers with less than three years of service can be credited with a maximum of 4 percent compounded interest, while teachers with at least three years of service can be credited with up to 6 percent 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. Non-vested teachers leaving the pension system would have saved only 10 percent of their salary plus interest (see pension flexibility goal), which is below the level conventionally recommended by retirement advisers for individuals not also contributing to Social Security. While Ohio'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.
Ohio, however, does at least offer some portability to vested teachers leaving the system, which is rare among defined benefit plans. Vested teachers who choose to withdraw their contributions receive their own employee contribution and a 50 percent employer match plus interest. While it would be preferable for the state to offer a 100 percent match and allow employer contributions to teachers with less than five years of experience, Ohio is commended for at least offering vested teachers a partial employer match.
Ohio's defined benefit plan 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. Ohio's plan allows teachers to purchase time for previous teaching experience, up to five years. However, teachers must have one year of Ohio service for each year of purchased service. While better than not allowing any purchase at all, this provision is less than most states' and disadvantages teachers who move to Ohio with more teaching experience. In addition, because purchased service may not exceed Ohio service, teachers either have to purchase years one at a time or wait to purchase a lump sum, which makes the cost much more expensive than if allowed to purchase all years at the start of service in Ohio. The plan also allows for the purchase of approved leaves of absence, up to two years per leave.
Ohio's defined contribution plan is fully portable, fair and flexible to all teachers. Vesting affects a plan's portability and flexibility because it determines when and how teachers may receive benefits. In defined contribution plans, full vesting entitles teachers access to their funds and any available employer contributions (including any gains or losses on investments). Teachers who became members on or after July 1, 2013 are vested in 20 percent of the employer contributions for each full year of service. Thus, teachers become fully vested in 100 percent of the employer contributions after five years. Notably, teachers become eligible at age 50 to convert their account balance to a monthly pension, meaning they can receive monthly retirement payments for the rest of their life.
Ohio's combined plan consists of an employer-funded defined benefit component and an employee-funded defined contribution component. The plan, overall, is not fully portable and does not provide full vesting until year five. It also limits flexibility by restricting the ability to purchase years of service. However, Ohio is commended for offering access to employer contributions to vested teachers who withdraw their accounts.
Teachers in Ohio's combined plan vest in their defined contribution account immediately and vest in the defined benefit component at year five. The defined benefit component's vesting at five years of service limits the options of many teachers who leave the system prior to this point.
Non-vested teachers of the combined plan who choose to withdraw their contributions only receive the balance of their defined contribution accounts. This places Non-vested teachers in the combined plan in the same position as Non-vested teachers in the defined benefit system. They may have saved far less than recommended for those who do not participate in Social Security and may be disadvantaged if they want to buy service in a new state. Vested teachers of the combined plan have different options depending on their age. Vested teachers in the combined plan who retire before age 50 may withdraw the entire balance of both their defined contribution accounts and their defined benefit accounts, or they may remain inactive until age 50 and take monthly retirement benefits. The value of the defined benefit account available for withdrawal is equal to the present value of future benefits. For example, a teacher with 10 years of service is eligible for 10 percent of final average salary at age 60, so the withdrawal is equal to the present value of that benefit. Vested teachers who are age 50 or over may withdraw the balance of their defined contribution accounts, and they may leave their defined benefit portion to receive defined benefit payments upon reaching retirement age.
Commendably, teachers in the combined plan have flexibility regarding leaves of absence. Teacher may purchase service for leaves of absence and make contributions to their defined contribution accounts for teaching service missed while on leave.
State Teachers Retirement System of Ohio, Service Retirement and Plans of Payment for members enrolled in the Defined Benefit Plan, 2014-15. State Teachers Retirement System of Ohio, Purchasing Service Credit for members enrolled in the Defined Benefit Plan, 2014-15. State Teachers Retirement System of Ohio, Service Retirement and Plans of Payment for members enrolled in the Defined Contribution Plan, 2014-15. State Teachers Retirement System of Ohio, Service Retirement and Plans of Payment for members enrolled in the Combined Plan, 2014-15. Aldeman, C. and Rotherham, A. (2014). Friends without Benefits: How States Systematically Shortchange Teachers’ Retirement and Threaten Their Retirement Security, Bellwether Education Partners.
Increase the portability of its defined benefit plan, the defined benefit component of its combined plan, and its defined contribution plan.
If Ohio maintains its defined benefit plan and a defined benefit component within its combined plan, it should allow all teachers that leave the system to withdraw their employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience at the start of employment, at least one year per approved leave of absence with a maximum of total purchased service, and decrease the vesting requirement to year three. Finally, the state should revert back to allowing teachers in the defined contribution plan to vest fully in employer contributions after one year. A lack of portability is a disincentive to an increasingly mobile teaching force.
Offer a fully portable supplemental retirement savings plan.
If Ohio 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.
Ohio was helpful in providing information that enhanced 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.