Pension Flexibility: Maryland

Analysis of Maryland's policies

Maryland only offers a defined benefit pension plan to its teachers as their mandatory pension plan. This plan is not fully portable, does not vest until year five (or year 10 for new teachers), and does not provide any employer contribution for teachers who choose to withdraw their account balances when leaving the system. It also limits flexibility by restricting the ability to purchase years of service. 

Teachers in Maryland 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. Teachers in Maryland hired prior to July 1, 2011, vest at year five; vesting has been raised for teachers hired after that date to year 10. Teachers who leave the system prior to these points have limited options.

Many teachers will leave the system before they reach 10 (or even five) years of service. Teachers in Maryland 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.

Maryland 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. Maryland's plan allows teachers to purchase time for previous teaching experience, up to 10 years. While better than not allowing any purchase at all, this provision disadvantages teachers who move to Maryland with more teaching experience. However, the state's plan does allow teachers to purchase up to 24 months of time per approved leave of absence, which is an advantage to teachers who need to take time for maternity or paternity leave or for other personal reasons.

Citation

Reformed, Contributory, and Non-Contributory Pension Systems for Employees and Teachers of the State of Maryland, Benefits Handbook http://www.sra.state.md.us/Participants/Members/Downloads/Handbooks/BenefitHandbook-Emp-Pen.pdf

Recommendations for Maryland

Offer teachers a pension plan that is fully portable, flexible and fair.
Maryland 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 Maryland participate in Social Security, they are required to contribute to two defined benefit-style plans.

Increase the portability of its defined benefit plan.
If Maryland maintains its defined benefit plan, it should allow teachers that leave the system to withdraw employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience 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 Maryland maintains its defined benefit 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

Maryland was helpful in providing NCTQ with facts that enhanced this analysis.