The state should ensure that pension systems are portable, flexible and fair to all teachers.
Tennessee no longer offers a defined benefit pension plan to its teachers as their mandatory pension plan. The state now offers a hybrid plan for members hired on or after July 1, 2014. A hybrid plan has elements both of defined benefit and defined contribution plans. Although Tennessee's plan is a hybrid, the defined benefit part 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.
Under the hybrid plan, teachers and employers contribute to both a defined benefit component and a defined contribution component. Two percent of earnings from members are automatically deposited into the defined contribution account unless a member actively elects not to contribute. To opt out, a member must file a notification no later than 30 days from hire. Employers contribute five percent regardless of whether a member contributes or elects not to contribute. Members immediately vest in employee and employer contributions to their defined contribution accounts.
Teachers in Tennessee also participate in Social Security, so they must contribute to the state's defined benefit part of its hybrid 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. Tennessee'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, 56 percent of employees in Tennessee's teacher-covered pension plan vest, meaning that 44 percent of teachers do not become eligible for a pension and, therefore, can only collect their refundable contributions.
Tennessee is commended for allowing teachers to keep at least a portion of the employer contributions. Teachers receive the balance in their defined contribution plan, including employer contributions (plus investment gains or losses). Teachers in Tennessee who choose to withdraw their contributions from the defined benefit plan upon leaving, however, only receive their own employee contributions plus accumulated 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.
Tennessee 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. Tennessee's plan allows vested teachers to purchase time for previous teaching experience, up to the amount of years of Tennessee service earned. Once teachers purchase service, however, they must retire at that point with at least 30 years of service and be less than 60 years old; they may only make a one-time purchase that is all of their out-of-state time or the amount of time that makes them reach 30 years of total service. While better than not allowing any purchase at all, this provision disadvantages teachers who move to Tennessee with more teaching experience or who want to purchase service before retirement. In addition, the mandatory delay before purchasing previous service makes the purchase cost much more expensive than if allowed at the start of employment. The state's plan does not allow for the purchase of maternity or paternity leaves, which is a severe disadvantage to any teacher who needs to take leave for parental care or for other personal reasons
Tennessee Consolidated Retirement System. Hybrid Pension Plan for State Employees and Teachers, April 2014. Tennessee Department of Treasury, Tennessee Consolidated Retirement System, “Should I Consider Purchasing Out-of-State Service?” http://www.treasury.state.tn.us/tcrs/Out-Of-State. 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.
Tennessee is commended for switching from a defined benefit plan to a hybrid plan. It should, however, also offer teachers for their mandatory pension plan the option of either a pure 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, including a hybrid. As the sole option, however, the defined benefit component of hybrid plans still disadvantages mobile teachers and those who enter the profession later in life. Because teachers in Tennessee participate in Social Security, they are required to contribute to two defined benefit-style plans.
Increase the portability of the defined benefit component of its plan.
If Tennessee maintains its hybrid plan, it should allow teachers that leave the system to withdraw their employee contributions plus interest and employer contributions from the defined benefit component. Tennessee should allow its employees to make contribution to their retirement accounts above the mandatory contributions. The state should also allow teachers to purchase their full amount of previous teaching experience at the start of employment, allow for the purchase of at least one year per approved leave of absence, and decrease the vesting requirement to year three. A lack of portability is a disincentive to an increasingly mobile teaching force.
Tennessee 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.