Incentives Get Teachers to Switch to DC Plan

A new research report suggests public school teachers would not choose a DC retirement plan over a DB retirement plan without powerful incentives.

The National Institute for Retirement Security (NIRS) concludes that public school teachers prefer defined benefit (DB) pension plans over defined contribution (DC) retirement plans.

The NIRS examined the retirement benefit elections of teachers in two states when new teachers had a choice between a DB plan or a plan that combines a defined contribution DC individual account with a DB pension. In 1997, approximately 75% of teachers in Washington State elected to switch to the DC-DB combined plan. However, the analysis found the combined DB-DC plan offered by the state included special features and circumstances that enticed teachers to switch.

Teachers were provided with upfront financial payments in 1997 that encouraged the switch. The NIRS said a teacher with 15 years experience received approximately $43,000 to switch. The institute notes that state retirement systems’ current financial status would make such incentives unlikely.

In addition the NIRS found stock market conditions with double-digit gains in the 1980s and 1990s may have caused teachers to overestimate the future value of their DC accounts. Thus, the combined DB-DC plan appeared more attractive in 1997. The state also offered in-plan annuitization of a teacher’s DC account balance, so he or she would receive guaranteed lifetime income with the state reassuming the longevity risk.

Ohio had a far different outcome than Washington during the years when teachers could choose between a DB plan and a DB-DC combination plan. Between 2002 and 2014, 86% of new teachers opted to join the traditional DB plan and only 4% opted for the combined plan. The remaining 10% chose the DC plan, the third option available in Ohio.

The NIRS notes its research has found the financial security provided by DB pensions helps retain experienced teachers, leads to educational productivity and provides schools with an effective workforce management tool.

The research brief, “Teacher Retirement Plans: Case Studies in Washington and Ohio Indicate Value of Pensions,” can be downloaded from here.