Retirement benefits represent a large and growing share of educator compensation. An important question is whether the current retirement benefit systems are an efficient or equitable way to structure educator compensation. An examination of the incentives built into typical state defined benefit plans suggests otherwise. Benefits are highly back-loaded, producing large peaks in pension wealth accrual followed by valleys of negative accrual.
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The retirement security landscape has changed drastically for most workers over the last thirty years – except for public school teachers and other state and local government employees. Many private-sector employers have stopped offering traditional retirement plans, while most state and local employees remain covered by defined benefit (DB) pension plans. Research shows that DB plans have had strong effects on worker retention in the private sector, as workers delayed retirement until they cash in on large pension wealth accruals late in their careers and then retire abruptly.
This paper examines how controlling vendor access to public K-12 supplemental 403(b) plans improves teacher retirement outcomes by controlling the number of providers, products, investment options, and the level of fees that teachers pay on their retirement saving accounts. We sort retirement plan systems into two administrative levels (state or local school district) and two degrees of management and oversight (open access or controlled access). Open access management typically allows “any willing provider” access to plan participants.
K-12 employees are more confident than all U.S. workers that they will have a financially comfortable retirement. Greater confidence results, at least in part, from higher participation rates in retirement plans at work; almost 90% of K-12 employees participate in a plan. The defined benefit pension is the dominant form of primary retirement plan sponsored in the K-12 sector; in addition, the availability of supplemental 403(b) plans has become near-universal.
This report examines retirement planning and saving among the public sector work force (employees of states, counties, cities, towns and other municipalities) and worker confidence in their retirement income prospects. Compared with U.S. workers in general, public sector employees tend to be more confident that they will have enough money to live comfortably throughout retirement. State and local government employees are more likely than all workers to be retirement savers, but they are not necessarily better retirement planners.
The hospital workforce was surveyed regarding retirement planning, saving and investing behavior, as well as confidence in their retirement income prospects. Hospital workers are more likely than U.S. workers to be saving for retirement, but they are no more likely to have calculated how much they need to accumulate. Confidence levels among the hospital sector workforce regarding their prospects for a financially secure retirement generally mirror those of the U.S. workforce. Affording health care in retirement is a particular area of concern for hospital workers, as it is for all U.S.
The state and local government workforce is more confident regarding its prospects for a financially secure retirement than are American workers in general. Seventeen percent of state and local employees are very confident in their retirement income prospects and 50% are somewhat confident, compared with 13% and 36%, respectively, for U.S. workers. Eighty-six percent of state and local workers are currently saving for retirement, compared with 59% of U.S. workers in general.
The typical 401(k) plan has fundamental flaws when evaluated as a vehicle for providing retirement income security. Even though both TIAA funded plans and typical 401(k) plans are based on defined contribution financing, there are profound differences between the two. Understanding these design differences will be valuable to policy makers looking to reform the 401(k) system and also to employers and 401(k) institutional providers in reshaping their plans.
In the current economic climate, budget-constrained employers have begun to reexamine the design, funding, administration and governance of their retirement plans. A 2008 American Hospital Association survey indicated that about 60% of hospitals with DB plans are expecting increased pension costs. But largely missing from the standard approach to pension design is an assessment of the risks associated with any particular plan design. This paper proposes that plan sponsors add a financial risk management processes when reconsidering plan design.