Pension Flexibility: North Dakota

Analysis of North Dakota's policies

North Dakota 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. However, the state is commended for offering flexibility to teachers by allowing them to purchase years of service. 

Teachers in North 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 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. Nonvested teachers do not have a right to later retirement benefits; they may only withdraw the portion of their funds allowed by the plan. North Dakota's vesting at five years of service limits the options of teachers who leave the system prior to this point.

Teachers in North Dakota who choose to withdraw their contributions upon leaving only receive their own contributions plus 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. 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.

North Dakota provides teachers with the 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. North Dakota's plan allows teachers to purchase unlimited time for previous teaching experience and approved leaves of absence. This provision is rare and a great advantage to those who move to North Dakota with teaching experience and those who need to take a leave for paternity or maternity care, or for other personal reasons.

Citation

North Dakota Teachers' Fund for Retirement Member Handbook, effective August 1, 2011 http://www.nd.gov/rio/TFFR/Publications/Handbook.pdf

Recommendations for North Dakota

Offer teachers a pension plan that is fully portable, flexible and fair.
North Dakota 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. However, as the sole option, defined benefit plans severely disadvantage mobile teachers and those who enter the profession later in life. Because teachers in North Dakota participate in Social Security, they are required to contribute to two defined benefit-style plans.

Increase the portability of its defined benefit plan.
If North Dakota maintains its defined benefit plan, it should allow teachers that leave the system to withdraw employer contributions. The state should also 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 North Dakota 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.

State response to our analysis

North Dakota stated that while the state sponsors a defined benefit (DB) plan, North Dakota public school teachers also have access to a supplemental defined contribution (DC) plan, usually through a 403(b) plan, sponsored by school districts rather than the state.

The state noted that many North Dakota Teachers' Fund for Retirement (NDTFFR) members are vested after three years (Tier 1 members employed prior to 7/1/08); however, some are vested after five years (Tier 2 members employed after 7/1/08).

North Dakota contended that NDTFFR members who withdraw their funds when they stop teaching receive member contributions plus 6 percent interest which is well in excess of the interest they would earn in a basic savings account. Should the member terminate and select a refund, these member contributions plus interest would help fund service purchases in another retirement system.

The state made the following additional comment: "It should also be noted that in addition to salary, pensions are important tools in attracting and retaining qualified teachers. Traditional DB pensions have been shown to be overwhelmingly and consistently preferred by teachers, offer a proven track record in helping in their recruitment and retention, and provide a good deal for taxpayers.

"DB plans help attract and retain teachers. Recent studies have shown that younger employees, when exposed to the pros and cons of each type of pension plan, prefer the traditional pension model. Furthermore, economists have repeatedly found that DB pension plans provide strong incentives for employee retention. Employees with a DB plan tend to report higher levels of commitment than those with only a DC plan. Public employers rely on their pension plan to help retain quality workers, particularly in a profession like teaching that relies on long-term or career-oriented professionals. 

"DB plans are a good deal for taxpayers. Because of their group nature, DB plans are much more efficient at delivering retirement benefits than individual account-based DC plans. In fact, a recent study by the National Institute on Retirement Savings (NIRS) shows that a DB plan can provide a target level of retirement income at almost half the cost of a DC plan. Professionally managed, pooled assets offered by DB plans help assure greater returns and reduced investment risk, and have served to keep taxpayer costs to only about one-fourth the total cost of existing teacher pensions.
 
"The unprecedented declines in the value of individual retirement savings plans in 2008-09 have borne out the long-held fears of many that such 401(k)-type plans alone cannot be depended on to provide for adequate, reliable lifetime retirement security. Therefore, promoting DC plans as a replacement for the existing DB model would not appear to improve teacher recruitment and retention."

Last word

NCTQ's analysis is limited to members that entered the system in the 2010-2011 academic year, as including all tiers for all plans would be confusing and cumbersome within each analysis. Furthermore, the policies that apply to new teachers represent the state's current approach moving forward.

While commendable that individual employers may provide supplemental savings plans, this option does not guarantee access to all teachers, as some employers may not participate. 

The state does offer interest at a higher rate than current basic savings plans. This is a valuable aspect of the system for teachers who choose to withdraw their contributions. The former 8 percent rate is similar to offering an employer match. However, interest rates credited to accounts are easily altered, as shown with its change that applies to all members, and returning to its previous policy of a guaranteed employer match of contributions would offer more security for teachers who withdraw their funds.

Defined contribution plans can be structured to have many of the benefits of defined benefit plans but with the added benefits of portability and flexibility to attract new individuals to the profession and to treat all teachers fairly for each year of service, not to mention less stress to states' financial health (see Goal 4-H). Plans can be structured as cash balance plans that allow the employer to maintain the investment risk and to include benefits such as disability and survivor coverage. Increased participation in defined contribution plans may also result in lower fees more commensurate with defined benefit plans. Teachers' individual accounts can be invested in statewide, professionally managed funds to align their earnings and losses with other statewide plans, such as a defined benefit plan. Teachers must receive proper education on topics such as longevity risk, tax implications and annuity options. 

Defined benefit plans do provide retirement security to long-time teachers but at a great cost both in terms of actual dollars spent and the commitment of those dollars to the pension system rather than other compensation strategies that may aid in recruitment and retention. The benefits are so back loaded and tied to longevity, that the dollars spent on retirement are often not valued because they are not seen by potential employees. Many individuals may never enter the profession if they know they may not be able to dedicate 25 or more years within one system because they can receive more balanced compensation in a different sector. Teachers who move between states, while still dedicating their life to teaching, receive far less in retirement benefits even though they educated just as many students for just as long as teachers who spend their entire career in a single state. Further, our systems need to attract highly effective teachers who can produce great results, especially in high-needs schools, whether or not they are prepared to make a career-long commitment or only teach for shorter periods of time.  A defined benefit pension system does not grant shorter-term teachers the same pension wealth per year of teaching as a teacher who was able to teach longer in a different assignment.