Pension Flexibility: North Carolina

Analysis of North Carolina's policies

North Carolina 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, 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. The state, however, is commended for offering a fully portable supplemental savings plan.

Teachers in North Carolina 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. 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. Teachers in North Carolina vest at five years. Teachers who leave the system prior to these points have limited options.

Many teachers in North Carolina will leave the system before they reach five years of service. Non-vested teachers who choose to withdraw their employee contributions upon leaving receive their employee contributions plus 4 percent interest. Although North Carolina provides 4 percent interest on refundable contributions, this rate is below the plan's own assumed rate of return of 7.25 percent on investment experience. Thus, interest credited to refunds is lower than what the system assumes it makes on teachers' contributions. Moreover, teachers who take a refund benefit receive less than what they could potentially have earned had they invested their contributions elsewhere. 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 entitled to any employer contributions.

North Carolina 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. North Carolina's plan allows teachers with at least five years of service to purchase time for previous teaching experience, up to 10 years, and it allows one year of out-of-state service to be purchased for each year of service earned under North Carolina's plan. While better than not allowing any purchase at all, this provision disadvantages teachers who move to North Carolina with more teaching experience. In addition, the mandatory five year of service before purchasing previous service makes the purchase cost more expensive than if allowed earlier. The state's plan also allows teachers with at least five years of service to purchase up to six months of service per approved leave of absence. This is a disadvantage to any teacher who needs to take more than six months of a leave for paternity or maternity care, or for other personal reasons.

The state is commended for offering a fully portable supplemental savings plans. The state offers a 401(k) plan, 457 plan, and a 403(b) program with some employers offering contributions.

Citation

North Carolina Retirement Systems, Teachers' and State Employees' Retirement System, Your Retirement Benefits, revised January 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 North Carolina

Offer teachers a pension plan that is fully portable, flexible and fair.
North Carolina 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. As the sole option, however, defined benefit plans severely disadvantage mobile teachers and those who enter the profession later in life. Because teachers in North Carolina participate in Social Security, they are required to contribute to two defined benefit-style plans.

Increase the portability of its defined benefit plan.
If North Carolina maintains its defined benefit plan, it should allow all teachers that leave the system to withdraw interest and employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience, 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 an employer contribution to the supplemental retirement savings plan.
While North Carolina 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

North Carolina did not respond to repeated requests to review this analysis.