Pension Flexibility: Utah
Pensions Policy
Analysis of Utah's policies
Utah offers the option of a defined contribution plan or a hybrid plan for all teachers. All new teachers have up to one year to choose, and the choice is irrevocable.
Utah's hybrid plan closely resembles a defined benefit plan. It is not fully portable, does not vest fully until year four and does not provide any guaranteed employer contribution for teachers who withdraw their accounts. It also limits flexibility by restricting the ability to purchase years of service.
Utah's hybrid plan consists of a defined contribution component funded by teachers' contributions and possible employer contributions, and a defined benefit component funded by employer contributions and, if needed, teacher contributions. Employers contribute 10 percent. If the defined benefit component's expenses are less than 10 percent, any excess goes into the teacher's defined contribution account. If the costs exceed 10 percent, teachers are required to contribute the difference (by automatic deduction from their salary) to fund the defined benefit component, and no employer funds will go into the employee's defined contribution account. Therefore, depending on plan expenses and market conditions, teachers may end up better off or worse off than a traditional defined benefit system. For fiscal year 2017, the cost of the defined benefit component was 8.22 percent; therefore, 1.78 percent from employers was deposited into the defined contribution component. Employees may make their own optional contributions to their 401(k) accounts.
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 the portion of their funds allowed by the plan. Utah's defined benefit component's vesting at four years of service is better than most states'; however, it still limits the options for many teachers who leave the system prior to this point. According to a recent report, 52 percent of employees in Utah's teacher-covered pension plan vest, meaning that 48 percent of teachers do not become eligible for a pension and, therefore, can only collect their refundable contributions. For the defined contribution component, teachers vest immediately in their own contributions and at four years of service in the optional employer contributions.
When teachers leave the system they may withdraw the portion of their accounts in which they are vested. Teachers with less than four years of service may only withdraw their own contributions with earnings or losses. Teachers with at least four years of service may withdraw their own plus the possible employer contributions with earnings or losses. Teachers may be leaving the system with no savings beyond Social Security. Furthermore, 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 guaranteed any employer contribution.
Utah's defined benefit plan 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. Utah's plan allows teachers with four years of service to purchase unlimited time for previous teaching experience. While unlimited purchase is better than what most states allow, because teachers have to wait four years to purchase service, the cost may be much more expensive than if they were allowed to purchase all years at the start of service in Utah. In addition, the plan does not explicitly allow for the purchase of approved leaves of absence, such as maternity and paternity leave. (The state does allow the purchase of time while on short-term disability.) This is a disadvantage to those who need personal leaves of absence during the course of their career. Utah's defined contribution plan is fully portable and flexible for teachers.
In Utah's defined contribution plan, the full employer contribution of 10 percent goes into the teacher's account. The employee may make additional contributions. In defined contribution plans, full vesting entitles teachers access to their funds and any available employer contributions. Utah's defined contribution plan, like its hybrid plan, vests at four years for employer contributions and immediately for employee contributions (if any). When vested teachers end their service in Utah, they may withdraw their contributions, the employer contributions and their earnings or losses.
Recommendations for Utah
Increase the portability of the defined benefit component of its hybrid plan.
If Utah maintains its defined benefit plan, it should allow all teachers that leave the system to withdraw their employer contributions. The state should also allow teachers to purchase at least one year per approved leave of absence and 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 Utah maintains its hybrid 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
Utah did not respond to repeated requests to review this analysis.
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Pensions
Research rationale
Nearly all states continue to provide teachers with a defined benefit pension system, an expensive and inflexible model that neither reflects the realities of the modern workforce nor provides equitable benefits to all teachers. To achieve the maximum benefits from such a plan, a teacher must begin and end his or her career in the same pension system. Teachers who leave before vesting—which is as much as 10 years in some states—are generally entitled to nothing more than their own contributions plus some interest. This approach may well serve as a retention strategy for some, but on a larger scale it fails to reflect the realities of the current workforce. At present, the United States is experiencing an explosion in school-age populations in some states, while other states are experiencing a decline. The nation's workforce needs to be able to respond to these changes. The current workforce is increasingly mobile, with most entering the workforce expecting to change jobs many times. All workers, including teachers, may move to jobs in other states with no intention of changing careers. To younger teachers in particular, a defined benefit plan may seem like a meaningless part of the compensation package and thus fail to attract young talent to the profession. A pension plan that cannot move across state lines and that requires a long-term commitment may not seem like much of a benefit at all.
There are alternatives. Defined contribution plans are fair to all teachers at all points in their careers. These plans are more equitable because each teacher's benefits are funded by his or her own contributions plus contributions from the employer specifically on the individual employee's behalf. This is fundamentally more equitable than defined benefit plans, which are generally structured to require new teachers to fund the benefits of retirees. Moreover, defined contribution plans are inherently portable and give employees flexibility and control over their retirement savings. It must also be noted that defined benefit plans can be portable and fair, if structured as cash balance plans or plans that permit the withdrawal of employer contributions.
Pension Flexibility: Supporting Research
NCTQ's analysis of the financial sustainability of state pension system is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office, 2007, 30 and Government Accounting Standards Board Statement No. 25.