Pension Flexibility: Maryland

Analysis of Maryland's policies

Maryland 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 ten, 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. The state, however, is commended for offering a fully portable supplemental savings plan.

Teachers in Maryland 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 their own contributions plus interest. Teachers in Maryland hired after July 1, 2011 vest at year ten. Teachers who leave the system prior to these points have severely limited options. According to a recent report, about 43 percent of employees in Maryland's teacher-covered pension plan vest, meaning that 57 percent do not become eligible for a pension and, therefore, can only collect their refundable contributions.

Teachers in Maryland 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 in most states to purchase the time equivalent to their prior employment in the new system because they are not entitled to any employer contribution.

Maryland 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. Maryland's plan allows teachers to purchase time for previous teaching experience, up to 10 years. While better than not allowing any purchase at all, this provision disadvantages teachers who move to Maryland with more teaching experience. The state's plan does allow teachers to purchase up to two years of time per approved leave of absence, however, which is an advantage to teachers who need to take time for maternity or paternity leave or for other personal reasons.

Maryland is commended for allowing teachers to enroll in the Maryland Teachers and State Employees Supplemental Retirement Plan, which offers a variety of supplemental retirement plans. Teachers may enroll in a 457(b) deferred compensation plan, 401(k) savings and investment plan, and 403(b) tax deferred annuity plan. The state maintains an informational website to provide teachers with the choices that are available to them and allows them to compare products prior to participating in a particular plan. There is no employer contribution to these accounts, however, for teachers hired after June 30, 2011.

Citation

Maryland State Retirement and Pension System, Actuarial Valuation Report as of June 30, 2015. Aldeman, C. and Rotherham, A. (2014). Friends without Benefits: How States Systematically Shortchange Teachers’ Retirement and Threaten Their Retirement Security, Bellwether Education Partners. Maryland Teachers & State Employees Supplemental Plans, https://www.marylanddc.com/

Recommendations for Maryland

Offer teachers a pension plan that is fully portable, flexible and fair.
Maryland 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 Maryland participate in Social Security, they are required to contribute to two defined benefit-style plans.

Increase the portability of its defined benefit plan.
If Maryland 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.

State response to our analysis

Maryland had no comment on this goal.

Updated: December 2017