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. However, Ohio is commended for offering a 50 percent employer match to employees in the defined benefit plan that 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. Nonvested teachers do not have a right to later retirement benefits; they may only withdraw the portion of their funds allowed by the plan. Ohio's defined benefit plan vests at five years of service, limiting the options of teachers who leave the system prior to this point.
Nonvested 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 interest (the current rate is 2 percent), while teachers with at least three years of service can be credited with up to 6 percent interest (the current rate is 3 percent). 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. Nonvested teachers leaving the pension system would have saved only 10 percent of their salary plus interest (see Goal 4-G), 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. 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.
However, Ohio 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. Teachers in Ohio's defined contribution plan vest in their contributions immediately and in their employer contributions after one year of membership. When teachers with at least one year of service in the defined contribution plan stop teaching in Ohio, they may withdraw their current account balance, which represents their own and their employer's contributions plus any earnings (or reduced by any losses). Teachers with less than one year of service are not entitled to withdraw any employer contributions and attributed earnings or losses.
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 components vesting at five years of service limits the options of teachers who leave the system prior to this point.
Nonvested teachers of the combined plan who choose to withdraw their contributions only receive the balance of their defined contribution accounts. This places nonvested teachers in the combined plan in the same position as nonvested 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 Active Members' Website https://www.strsoh.org/active/index.html
Increase the portability of its defined benefit plan and the defined benefit component of its combined 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. 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 NCTQ with facts that enhanced this analysis.