Pension Flexibility: Rhode Island

Analysis of Rhode Island's policies

Rhode Island 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 10, 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. 

Some teachers in Rhode Island 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. Rhode Island's vesting at 10 years of service is very late and limits the options of teachers who leave the system prior to this point.

Many teachers will leave the system before they reach 10 years of service. Teachers in Rhode Island who choose to withdraw their contributions upon leaving only receive their own employee contributions. This means that those who withdraw their funds accrue fewer benefits than they might have earned had they simply put their contributions in basic savings accounts. Therefore, for teachers working in a district that does not participate in Social Security, leaving the pension system would have saved only 9.5 percent of their salary plus interest (see Goal 4-H), which is below the level conventionally recommended by retirement advisers for individuals not contributing to Social Security. 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. 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.

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 Island Handbook http://www.ersri.org/public/documentation/Membership&RetirementHandbook_Sept2010.pdf

Recommendations for Rhode Island

Offer teachers a pension plan that is fully portable, flexible and fair.
Rhode Island 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 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 its defined benefit plan.
If Rhode Island maintains its defined benefit plan, it should allow teachers that leave the system to withdraw their employee contributions plus interest and employer 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.   

Offer a fully portable supplemental retirement savings plan.
If Rhode Island 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

The Employees' Retirement System of Rhode Island did not respond to repeated requests to review NCTQ's analyses related to teacher pensions.