Pension Flexibility: Michigan

Analysis of Michigan's policies

Michigan offers teachers who become a member on or after September 4, 2012 a choice between a type of hybrid pension plan, known as Pension Plus, and the Defined Contribution (DC) plan, an employee 401(k) retirement account. A hybrid plan has elements of both defined benefit and defined contribution plans. Even though Michigan's plan is a hybrid, it is not fully portable, does not fully vest until year 10, and only provides minimal employer contribution for teachers who withdraw their accounts. It also limits flexibility by restricting the ability to purchase years of service. The DC plan is fully portable, and teachers can vest in the full amount of employer contributions after 4 years.

Under the hybrid plan, teachers and employers contribute to both a defined benefit component and a defined contribution component. Contributions to the defined benefit component are mandatory, while contributions to the defined contribution component are optional. Teachers automatically contribute 2 percent of their salary to the defined contribution component with employers contributing a 50 percent match up to 1 percent of salary. Teachers may choose to increase or decrease their contribution levels. Although the hybrid plan is not fully portable, the state is commended for offering a DC plan as an option for Michigan teachers, which allows full portability of teachers' retirement accounts. Given that teachers in Michigan also participate in Social Security, concurrently providing a DC plan as an option for teachers affords more flexibility for retirement as Social Security provides a lifetime of payments while the DC plan offers more control and direction over retirement savings.

In 2012, Michigan passed Public Act 300 which offers all active members who first became a member before July 1, 2010 to make a voluntary election regarding their contributions and benefits. Any changes are applied as of the first day of one's pay period after February 1, 2013. Members could elect to increase their contributions in exchange for keeping the 1.5 percent multiplier, keep contributions the same in exchange for a reduced 1.25 percent multiplier, or discontinue contributions to the pension fund in exchange for switching to the DC plan.

Vesting in the DC plan and DC component of the hybrid plan entitles teachers to permanent rights to their own contributions and any available employer contributions. Michigan teachers vest immediately in their own contributions to the defined contribution plan and all employer contributions after four years of service.

Vesting in the defined benefit component of the hybrid 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. Michigan's vesting at 10 years of service is very late and limits the options of teachers who leave the system prior to this point, though teachers who leave early at least have an option to join a fully portable plan instead. Many teachers in Michigan will leave the system before they reach 10 years of service. According to a recent report, about 43 percent of employees in Michigan's teacher-covered pension plan vest, meaning that 57 percent do not become eligible for a pension and, therefore, can only collect their refundable contributions. Teachers in the hybrid plan who choose to withdraw their contributions upon leaving only receive their own contributions and accrued interest from the defined benefit part. Further, teachers who remain in the field of education but enter another pension plan (such as in another state) may 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 from the defined contribution component.

Michigan does not allow teachers to purchase years of service, either for previous teaching or for leaves of absence, for use in the Pension Plus (hybrid) plan. 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. Michigan's plan does not allow teachers to purchase time for previous teaching experience or for time while on approved leaves of absence. This provision is a disadvantage to teachers who move to Michigan with teaching experience and those teachers who need to take more than one year of leave, such as for maternity or paternity leave.

Citation

Michigan Public School Employees’ Retirement System, Comprehensive Annual Financial Report for fiscal year ended September 30, 2015. Aldeman, C. and Rotherham, A. (2014). Friends without Benefits: How States Systematically Shortchange Teachers’ Retirement and Threaten Their Retirement Security, Bellwether Education Partners.

Recommendations for Michigan

Increase the portability of its defined benefit plan.
If Michigan maintains its defined benefit plan with a hybrid component, it should allow teachers that leave the system to withdraw employer contributions from the defined benefit component. The state should also allow teachers to purchase their full amount of previous teaching experience upon the first day of employment, allow for the purchase of at least one year for each approved personal leave and decrease the vesting requirement to year three. A lack of portability is a disincentive to an increasingly mobile teaching force.

State response to our analysis

Michigan acknowledged the factual accuracy of this analysis.

Updated: December 2017