Pension Flexibility: Rhode Island

Analysis of Rhode Island's policies

Rhode Island no longer offers a defined benefit plan to its teachers. The state now only offers teachers a hybrid pension plan as their mandatory pension plan. A hybrid plan has elements both of defined benefit and defined contribution plans. Although Rhode Island's plan is a hybrid, the defined benefit part 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.

Under the hybrid plan, teachers and employers contribute to both a defined benefit component and a defined contribution component. Rhode Island teachers contribute 5 percent to the defined contribution plan while employers contribute 1 percent. Each party also contributes an additional 2 percent if the teacher does not enroll in Social Security. On its face, this is a laudable structure, as it has the portability, control and neutrality of a defined contribution plan. The employer rate, however, is quite low and would be more meaningful for teachers if there was an employer match.

Some teachers in Rhode Island also participate in Social Security, so they must contribute to the state's defined benefit portion of the hybrid 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. Rhode Island's vesting at five years of service limits the options of many teachers who leave the system prior to this point. According to a recent report, 58 percent of employees in Rhode Island's teacher-covered pension plan vest, meaning that 42 percent of teachers do not become eligible for a pension and, therefore, can only collect their refundable contributions.

Rhode Island is commended for allowing teachers to keep at least a portion of the employer contributions. Teachers receive the balance in their defined contribution plan, including employer contributions (plus investment gains or losses). Teachers who choose to withdraw their contributions from the defined benefit plan upon leaving, however, only receive their own employee contributions, meaning that those who withdraw their funds accrue fewer benefits than they might have earned had they simply put their contributions in basic savings accounts.

While Rhode Island's mandatory contribution rate allows for flexibility in teachers' retirement savings, it also means that the state needs to educate teachers who work in districts not participating in Social Security on what happens if they leave the system and encourage savings in other portable supplemental plans. 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 contribution.

Rhode Island 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. Rhode Island's plan allows teachers to purchase time for previous teaching experience, up to five years. While better than not allowing any purchase at all, this provision is less than most states' and disadvantages teachers who move to Rhode Island with more teaching experience. The state's plan also allows for the purchase of approved leaves of absence, up to four years. This may be a disadvantage for teachers who need to take more than four years of total leave over the course of their careers for personal reasons such as maternity or paternity care.

Citation

Employees' Retirement System of Rhode, An Employee’s Guide to Understanding the Rhode Island Retirement Security Act, January 2012. 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 Rhode Island

Offer teachers a pension plan that is fully portable, flexible and fair.
Rhode Island is commended for switching from a defined benefit plan to a hybrid plan. It should, however, also 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, the defined benefit component of hybrid plans still disadvantage mobile teachers and those who enter the profession later in life. Because some teachers in Rhode Island participate in Social Security, they are required to contribute to two defined benefit-style plans. Those teachers who do not participate in Social Security have no fully portable retirement benefits that would move with them in the event they leave the system.

Increase the portability of the defined benefit component of its hybrid plan.
If Rhode Island maintains its hybrid plan, it should allow teachers that leave the system to withdraw their employee contributions plus interest and employer contributions from the defined benefit portion. Rhode Island should allow its employees to make contribution to their retirement accounts above the mandatory contributions. The state should also allow teachers to purchase their full amount of previous teaching experience, allow for the purchase of at least one year per parental 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

Rhode Island did not respond to repeated requests to review this analysis.