The state should ensure that pension systems are portable, flexible and fair to all teachers.
Vermont only offers a defined benefit pension plan 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.
Teachers in Vermont 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 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. Vermont'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, only 35 percent of employees in Vermont's teacher-covered pension plan vest, meaning that 65 percent of teachers do not become eligible for a pension and, therefore, can only collect their refundable contributions.
Teachers in Vermont who choose to withdraw their contributions upon leaving only receive their own employee contributions. This means that those who withdraw their funds accrue fewer benefits than 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.
Vermont 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. Vermont's plan allows teachers to purchase time for previous teaching experience, up to 10 years of total purchased time for all non-military categories. While better than not allowing any purchase at all, this provision disadvantages teachers who move to Vermont with more teaching experience or who want to purchase time for a variety of reasons. The state's plan allows teachers to purchase time for approved leaves of absence, including maternity or paternity leaves. In addition, the state allows teachers to purchase up to five years of "air time" for any reason once they have 25 years of service. Total credit purchases, however, may not exceed 20 years.
Vermont is commended for offering teachers access to two fully portable supplementary savings plans: a 457 plan and a 403(b) plan. The state provides a tax-deferred savings plan known as the Supplemental Retirement Plan (SRP). Contributions are made on a voluntary basis, are tax-free, and contain no employer contributions. Earnings from investment are deferred until withdrawals are made.
The Vermont State Teachers' Retirement System, “Eligibility for Retirement,” http://www.vermonttreasurer.gov/sites/treasurer/files/pdf/retireTeacher/misc/Group%20C2%20Ret%20Eligibility.pdf (accessed 10/25/2016). The Vermont State Teachers' Retirement System, “VSTRS Group C Plan Description,” http://www.vermonttreasurer.gov/content/retirement/vstrs-plans/group-c (accessed 10/25/2016). The Vermont State Teachers' Retirement System, “Deferred Compensation,” http://www.vermonttreasurer.gov/retirement/deferred-compensation (accessed 10/25/2016). 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.
Vermont 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 Vermont participate in Social Security, they are required to contribute to two defined benefit-style plans.
Increase the portability of its defined benefit plan.
If Vermont maintains its defined benefit plan, it should allow teachers that leave the system to withdraw employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience and decrease the vesting requirement to year three. A lack of portability is a disincentive to an increasingly mobile teaching force.
Offer an employer contribution to the supplemental retirement plan.
While Vermont at least offers teachers the option of a supplemental defined savings option, this option would be more meaningful if the state required employers also to contribute and if there were multiple investment options.
Vermont did not respond to repeated requests to review this analysis.