Pension Flexibility: Hawaii

Analysis of Hawaii's policies

Hawaii only offers a defined benefit pension plan to its teachers as their mandatory pension plan. This plan is not fully portable and does not vest until year five. It also limits flexibility by restricting the ability to purchase years of service. However, Hawaii is commended for offering a 50 percent employer match to employees that withdraw their funds before retirement age and for offering fully portable supplemental savings plans. Unfortunately, Hawaii's pension plan will become more restrictive and less portable for employees hired after June 30, 2012, when vesting time is increased and employer matching amount is decreased.

Teachers in Hawaii also participate in Social Security, so they must contribute to the state's defined benefit plan in addition to Social Security. Although retirement savings in addition to Social Security are good and necessary for most individuals, the state's policy results in mandated contributions to two inflexible plans, rather than permitting teachers options for their state-provided savings plans.

Vesting in a defined benefit plan guarantees a teacher's eligibility to receive lifetime monthly benefit payments at retirement age. Nonvested teachers do not have a right to later retirement benefits; they may only withdraw the portion of their funds allowed by the plan. Hawaii's current vesting at five years and future increase to 10 years of service limits the options of teachers who leave the system prior to this point.

Hawaii does at least offer some portability to vested teachers leaving the system, which is rare among defined benefit plans. Teachers with less than five years of experience who choose to withdraw their contributions upon leaving only receive their own contributions plus interest. This means that those who withdraw their funds accrue no benefits beyond what they might have earned had they simply put their contributions in basic savings accounts. Further, 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 entitled to any employer contribution. 

However, teachers with at least five years of experience who choose to withdraw their contributions are able to take a 50 percent employer match in addition to their contributions and the interest earned. While it would be preferable for the state to offer a 100 percent match and allow employer contributions to teachers with less than 5 years of experience, Hawaii is commended for offering all teachers at least a 50 percent employer match. Unfortunately, this employer match will be reduced to 20 percent for all teachers hired after June 30, 2012.

Hawaii 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. Hawaii's plan does not allow teachers to purchase time for previous teaching experience or to purchase time for approved leaves of absence. Not only is this a severe disadvantage to teachers who move to Hawaii with teaching experience, but also it is a tremendous disadvantage to any teacher who needs to take a leave for paternity or maternity care, or for other personal reasons.

Hawaii is commended for offering two optional supplementary defined contribution savings plans, a 403(b) plan and a 457 plan.  The 457 plan, known as the Island Savings Plan, is only available to employees of the State of Hawaii and Maui, Hawaii and Kauai counties. However, there is no employer contribution to these accounts.

Citation

State of Hawaii, Employees' Retirement System http://ers.ehawaii.gov/ Act 163 SLH 2011

Recommendations for Hawaii

Offer teachers a pension plan that is fully portable, flexible and fair.
Hawaii should offer teachers for their mandatory pension plan the option of either a defined contribution plan or a fully portable defined benefit plan, such as a cash balance plan. A well-structured defined benefit plan could be a suitable option among multiple plans. However, as the sole option, defined benefit plans severely disadvantage mobile teachers and those who enter the profession later in life. Because teachers in Hawaii participate in Social Security, they are required to contribute to two defined benefit-style plans.

Increase the portability of its defined benefit plan.
If Hawaii maintains its defined benefit plan, it should allow teachers leaving the system to withdraw 100 percent of employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience and approved leaves of absence and decrease the vesting requirement to year three. A lack of portability is a disincentive to an increasingly mobile teaching force.   

Offer an employer contribution to the supplemental retirement savings plans.
While Hawaii at least offers teachers the option of a supplemental defined contribution savings plan, this option would be more meaningful if the state required employers also to contribute.

State response to our analysis

Hawaii recognized the factual accuracy of this analysis.  The state was also helpful in providing facts that enhanced this analysis.