New optional retirement plan could reduce benefits
12/21/2018
Newly hired teachers in Indiana will now have a new retirement option, but the defined contribution (DC) plan may limit or reduce accumulated retirement benefits over the course of an educator’s career.
The new retirement option from the Indiana State Teachers’ Retirement Fund (TRF) received approval from the Internal Revenue Service. The plan allows new hires to select a DC-only plan with a shorter vesting period of five years.
The plan, while optional and voluntary for each new hire, reduces benefits for retirees. ISTA encourages individual members to select the best option for them personally, but there are some disadvantages of DC plans that are crucial to understand prior to selecting.
A DC-only option is a 401(k)-style plan, where members contribute individually into a retirement plan. This differs significantly from a traditional defined benefit (DB) plan – namely by removing the pension component from the benefit package and offering far less retirement security.
A window was not provided for a member to enroll in other plans once a selection is made upon employment. Therefore, whatever decision the new hire makes is irrevocable — the consequences of which will impact retirement earnings throughout an educator’s career. This piece of information is particularly important for recent graduates and individuals entering the profession for the first time to understand.
ISTA was critical of the plan during the legislative process, particularly with the plan’s potential to worsen the teacher shortage by diminishing benefits for newly hired educators and decreasing the vesting period for new teachers.
With fewer years to vest, it means teachers can take their retirement earnings to new careers and further increase attrition rates. We believe teaching should be respected as a career, not a short-term job.
DC plans are more volatile and dependent on the stock market. They shift the risk to the employee and add higher fees. DB plans have greater stability and higher returns, disperse investment risks and offer a guaranteed benefit. The security of having a pension has also been a good employee recruitment and retention tool.
Indiana Public Retirement System (INPRS) is expected to offer the option shortly. We encourage members to carefully weigh their retirement options.