Retirement savings plans: Finding the best options for educators

District leaders can guide teachers to a more financially sound future

Most public school teachers still have access to a state-funded pension plan.

But for the majority, their retirement benefits will be worth less than what they contributed during their years in the classroom, according to an analysis by the Fordham Institute.

The study, which examined the largest school districts in each state and in Washington, D.C., looked at how long it would take teachers to reach the “crossover point” when the value of their retirement benefits would equal or exceed their contributions.

The median crossover point for the 51 districts is 25 years, which means teachers must work for a particular district for a quarter century before their retirement payout will be worth more than what they personally contributed. Because few teachers stay in their jobs for that long, their retirement savings are ultimately lost.

SIDEBAR: Retirement language

Teachers face more hurdles than just the problems with state-run pensions. Educators who don’t rely on state pensions often have access to 403(b) retirement savings plans, which are similar to the 401(k)s used by private employers—but are often more lightly regulated.

A recent analysis showed that millions of people who save in 403(b)s may be losing almost $10 billion per year in excessive investment fees. In addition, nearly one-half of public school teachers do not participate in Social Security, says Keith Brainard, research director at the National Association of State Retirement Administrators.

That means for many teachers, the state pension system and 403(b)s are their only options for retirement planning.

As school districts clamor to recruit and retain high-quality teachers, a generous, dependable retirement savings plan can be an important draw. To offer that, district leaders must understand the challenges posed by current offerings and identify alternatives.

Who’s subsidizing who?

It takes decades for many teachers on state pensions to cross over into earning on their retirement savings. And plans that are not portable from one district to another “disadvantage young and mobile teachers relative to teachers who stay in the plan for their full careers” says Martin Lueken, author of the Fordham study.

For instance, teachers who split a career working in two systems will accrue only about half of the pension wealth that they would have received by working the same number of years under one system, Lueken says. And research shows that younger teachers’ retirement contributions are subsidizing the benefits of older teachers, and mobile teachers are subsidizing the benefits of full-career teachers.

In addition to the lack of portability, pension plans require teachers to make contributions that are not directly linked to their benefits.

Instead, “benefits are based on a formula that’s independent of contributions made” says Lueken, who also is director of fiscal policy and analysis at EdChoice, an organization that specializes in school choice research.

“Required contributions are estimated using a discount rate that made sense in the 1980s, but doesn’t make sense today” Lueken says.

Thirty years ago, for instance, it was common for a low-risk, 30-year bond to yield an 8 percent return; but today, the same bond would yield a return of about 3 percent. While most pensions anticipate 1980s-level returns, financial markets have changed considerably, Lueken says.

Many states also have pension debt on their books, showing that the plans are not fully funded. This means current teachers’ contributions are necessary to keep paying current retirees.

Making more informed decisions

While true changes to state-run retirement plans will have to come from lawmakers, district administrators can take several steps to improve their teachers’ retirement outlook.

One of the most important tools district leaders have is education, says Chad Aldeman, editor of and principal of Bellwether Education Partners, an organization focused on closing achievement gaps.

Many teachers need more information about how their retirement plans work and how to make the right decisions about their options.

“Ninety percent of teachers are enrolled in defined benefit pension plans, and those plans can be quite complicated” Aldeman says. “Teachers may not fully appreciate how the plans work or how much the district is spending on those benefits.”

Earlier-career teachers are often unaware of key milestones, such as when they “vest” in the plan and qualify for a pension.

Similarly, vested teachers who take a break from the classroom or leave the profession altogether face a difficult decision about whether to withdraw their money or wait for a pension upon retirement. “The math behind that decision is not intuitive, and districts could help teachers make the right decision for their unique circumstances” Aldeman says.

A few states allow educators to choose between a traditional pension plan and a more portable, defined contribution plan, such as a 403(b), or a “hybrid” plan that combines a smaller pension with a defined contribution component.

For most teachers who aren’t sure that they will remain in teaching, the portable option is typically the better choice. But “most of these states automatically default teachers into the pension plan” Aldeman says.

As a general rule, teachers who want to supplement their pension plans should look for “simple products like index funds with low fees of no more than 1 percent” Aldeman says.

“There are horror stories about teachers being targeted by predatory investment companies selling products with lots of hidden fees and opaque rules” Aldeman says. “District leaders could take a more active role in screening those financial vendors.”

Advocating for improvements

Even if decisions aren’t made locally, local actions can affect retirement plan legislation in the statehouse.

“Districts should stay in touch with policymakers to communicate the important role that retirement benefits play in enabling districts to attract and retain qualified teachers” says Brainard of the retirement administrators association. “Public employers often are among the largest employers in legislative districts, and legislators should be familiar with the public employees, including teachers, in their respective districts.”

In their interactions with legislators and elected officials, district administrators can advocate for changes that will make teacher retirement plans “more flexible and portable, more transparent, and more equitable, and that offer more choices for teachers with different preferences and life circumstances” says Lueken, the Fordham study author.

For instance, he recommends eliminating vesting requirements or shortening them to one or two years. Rather than encouraging retention, these requirements are too rigid for most modern teachers and are “not good for having a dynamic workforce” Lueken says.

In addition, administrators should push lawmakers to offer more plan choices, Lueken says.

A teacher with a defined contribution plan like a 401(k), who must leave the state midcareer—perhaps to care for an ill parent—can take the retirement plan with them, but in most cases, they would have to leave a defined benefit pension plan behind.

If state legislators aren’t interested in adding another type of plan, administrators should advocate for greater portability. For instance, in South Dakota, teachers who leave before reaching retirement eligibility can claim a refund benefit that includes both their own contributions and most of the employer contributions.

Managing plans creatively

Some districts manage certain p

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