The state should ensure that pension systems are portable, flexible and fair to all teachers.
Washington offers teachers a choice between a defined benefit plan, known as Plan2, and a hybrid plan, known as Plan 3. Teachers have 90 days from their first day of employment to choose between the two plans and that choice is irrevocable. If teachers do not make a choice, they are automatically enrolled in Plan 3. Washington teachers also participate in Social Security.
Plan 2 is a traditional defined benefit plan that is not fully portable, does not vest fully until year five and does not provide any employer contribution for teachers who withdraw their accounts. It also limits flexibility by restricting the ability to purchase years of service.
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. Plan 2'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 Washington'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.
Teachers who choose to withdraw their contributions upon leaving only receive their own employee contribution plus interest. This means that those who withdraw their funds accrue no benefits beyond what they might have earned contributing to 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.
Washington's Plan 2 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. Washington's plan allows teachers with two years of service to purchase previous teaching experience, up to seven years. Without purchasing credit, teachers may use previous teaching experience to qualify for retirement eligibility. While better than not allowing any purchase at all, this provision disadvantages teachers who move to Washington with more teaching experience and want it all included in their benefit calculation.
In addition, the mandatory two-year wait period makes the cost to purchase credit more expensive than if allowed to purchase all years at the start of service in Washington. The state's plan also allows for the purchase of approved leaves of absence, up to two years total. This is a disadvantage to teachers who need to take more than two years of leave over the course of their careers, such as for maternity or paternity care or for other personal reasons. Teachers negatively affected by these policies, however, may purchase five years for any reason at the time of retirement, but costs will be actuarially much more expensive than if allowed at the time of leave.
Washington's Plan 3 is a hybrid plan with a defined benefit and a defined contribution component. Teachers' contributions fund the defined contribution component, which can be invested with the Washington State Investment Board's Total Allocation Portfolio or among 11 different options in the Self-Directed Investment program. Because teachers in Plan 3 do not contribute to the defined benefit component, the benefit calculation for that part of the plan uses a lower multiplier than in Plan 2.
In defined contribution components, full vesting entitles teachers access to their funds and any available employer contributions. Plan 3 teachers vest immediately in their defined contribution component and at 10 years of service in their defined benefit component (or at year five if one year is worked after age 44). Teachers who choose to withdraw their contributions upon leaving only receive the amount in their defined contribution account, which includes their contributions and any accrued earnings.
Unlike in Plan 2, if vested Plan 3 teachers withdraw their defined contribution account, they will still receive lifetime benefits at retirement age because they cannot withdraw from their defined benefit account. The Plan 3 defined benefit account is completely employer funded, and, once vested, teachers are guaranteed their benefits. Vested teachers under Plan 3, however, may waive their defined benefit, without compensation, in order to transfer teaching time to another state.
Teachers in Plan 3 have the same regulations regarding purchasing time as those in Plan 2.
Washington State Teachers' Retirement System Plan 3 Member Handbook, updated October 2015. Washington State Teachers' Retirement System Plan 2 Member Handbook, updated October 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 its defined benefit plan and the defined benefit component of its hybrid plan.
If Washington maintains its defined benefit plan and the defined benefit component within its hybrid 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, 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 Washington 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.
Washington recognized the factual accuracy of 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.