The state should ensure that pension systems are portable, flexible and fair to all teachers.
South Dakota only offers a defined benefit pension plan to its teachers as their mandatory pension plan. This plan is nearly fully portable—considerably more so than any other defined benefit plan offered to teachers in other states—through provisions including vesting at year three and providing employer contributions to those that withdraw their account balances when leaving the system. The state is also commended for offering a fully portable supplementary savings plan.
Teachers in South 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 two defined benefit-style programs, 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. South Dakota's vesting at three years of service is better than most states, and allows flexibility for many of the teachers who leave the system.
South Dakota does offer some portability to both non-vested and vested teachers leaving the system, which is rare among defined benefit plans. Teachers with less than three years of experience who choose to withdraw their contributions upon leaving receive their own contributions plus interest and a 50 percent employer match. Teachers with at least three years of experience may withdraw their contributions plus interest and an 85 percent employer match. While it would be preferable for the state to offer a 100 percent match, South Dakota is commended for offering all teachers at least some employer match. Allowing non-vested teachers to keep at least half of employer contributions plus interest is a commendable feature of defined benefit plans, however, given that many teachers typically leave prior to vesting in pension plans. According to a recent report, 53 percent of employees in South Dakota's teacher-covered pension plan vest, meaning that 47 percent of teachers do not become eligible for a pension and, therefore, can only collect their refundable contributions.
South Dakota limits the 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. South Dakota is commended for unlimited purchase of out-of-state public service. South Dakota's plan also allows teachers to purchase up to 5 service credits of "air time." It does not allow teachers to purchase credit for maternity or paternity leave, however, which is advantage severe disadvantage to any teacher who needs to take leave for parental care or for other personal reasons.
South Dakota is also commended for offering a fully portable supplementary savings plan. The state provides a tax-deferred savings plan known as the Supplemental Retirement Plan (SRP). It is voluntary and contains no employer contributions.
South Dakota Retirement System. Income for Your Retirement, Class A, 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.
Increase the portability of the defined benefit plan.
If South Dakota maintains its defined benefit plan, it should allow teachers leaving the system to withdraw 100 percent of employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience at the start of employment as well as time for approved leaves of absence. A lack of portability is a disincentive to an increasingly mobile teaching force.
Offer an employer contribution to the supplemental retirement savings plan.
While South Dakota at least offers teachers the option of a supplemental defined contribution savings option, this option would be more meaningful if the state required employers also to contribute and if there were multiple investment options.
South Dakota was helpful in providing information that enhanced this analysis. South Dakota also noted "significant concerns about the negative position NCTQ has taken related to defined benefit plans in the past. SDRS has been successful in providing an efficient, effective and well-funded retirement plan with hybrid features and stable fixed matching contributions that have changed only once in approximately 40 years."
This analysis - and similar editions in years past - commends South Dakota for showing that a defined benefit system can be structured in a way that is financially sustainable and provides flexibility to teachers. Unfortunately, defined benefit systems in other states include few to none of the features that set South Dakota apart.
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.