Pension Flexibility: Tennessee

Analysis of Tennessee's policies

Tennessee 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. 

Teachers in Tennessee 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. Tennessee's vesting at five years of service limits the options of teachers who leave the system prior to this point.

Teachers in Tennessee who choose to withdraw their contributions upon leaving only receive their own employee contributions plus accumulated 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.
 
Tennessee 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. Tennessee's plan allows vested teachers to purchase time for previous teaching experience, up to the amount of years of Tennessee service earned. However, once teachers purchase service they must retire at that point with at least 30 years of service and be less than 60 years old; they may only make a one-time purchase that is all of their out-of-state time or the amount of time that makes them reach 30 years of total service. While better than not allowing any purchase at all, this provision disadvantages teachers who move to Tennessee with more teaching experience or who want to purchase service before retirement. In addition, the mandatory delay before purchasing previous service makes the purchase cost much more expensive than if allowed at the start of employment. The state's plan does not allow for the purchase of maternity or paternity leaves, which is a severe disadvantage to any teacher who needs to take leave for parental care or for other personal reasons.

Citation

Tennessee Consolidated Retirement System, Group 1 Teachers http://www.treasury.state.tn.us/tcrs/PDFs/teachers_intro.pdf

Recommendations for Tennessee

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

Increase the portability of its defined benefit plan.
If Tennessee 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 at the start of employment, 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 a fully portable supplemental retirement savings plan.
If Tennessee 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

Tennessee noted that further information on this issue can be reviewed in TN law (49-5-901 through 916).