The shift from defined benefit plans to defined contribution plans is not new. It may be less common in the public sector, but it is not unknown among public employers. A recent study looks at what that has meant for the Alaska education sector.
The National Institute on Retirement Security (NIRS) in “Alaska Teacher Recruitment and Retention Study: Options and Analysis Supporting Retirement Plan Design” examines the effect that shift has had on retention and recruitment in the teacher workforce in Alaska. It draws on data from the Alaska Retirement Management Board, the body that assumed fiduciary responsibility for the Alaska state retirement systems’ assets as of Oct. 1, 2005.
Background. In 2005, the Alaska legislature voted to close its two statewide DB plans for teachers and public employees in order to manage the unfunded plan liability. Beginning July 1, 2006, all new public employees hired by the state of Alaska — including teachers — participate in DC plans.
The NIRS says that the number of members of the Teachers Retirement System (TRS) plans (DB and DC combined) fell by 8% from 2005 to 2021. And the drop was sharper among teachers with 15 years of service or less—the number of teachers with 0-4 years of service fell by 11% during that time, and the number of those with 5-14 years fell by 18%. Further, the drop in the TRS was sharper than among the Alaska Public Employees' Retirement
System as a whole. Retention of employees with more than 15 years of service was higher.
Since the newer employees were participants in the DC plan the TRS offers, that means that more employees left the DC-based retirement plan than left the DB-based retirement plan.
The NIRS notes that the data does not attribute the retention rate drop only to the change in retirement plans. At the same time, however, it does say that “retirement offerings are a significant component of employment terms” and further points out that retention appears stronger among the DB participants.
The Bottom Line
The NIRS says that changing the retirement plans for Alaska public employees and the TRS not only did not address the funding shortfall, it also created recruitment and retention challenges.
“Based on the number of people leaving for reasons other than retirement, death, or disability, improving retention among those in the defined contribution plan presents the greatest opportunities” for the TRS, says the report.
And More Broadly…
More broadly, the NIRS says that during those 15 years, it says, other states have customized the benefits they offer, but most have not followed suit with Alaska’s approach. It adds that the benefits that the public sector employers offer have become more complex as those employers adopt hybrid and combined plans, as well as increased their use of risk-sharing features in the plans they offer.
The NIRS says that most states continue to offer a DB plan. When they offer combined plans, the NIRS finds, the DB plan is the “core benefit” and the DC plan is supplemental. Further, they say, employees prefer a DB plan when they are given a choice between that and DC plan; however, they add the caveat that a default option and the administrative processes a state uses also affect such results.
The NIRS argues that other states’ experiences “provide great insights” regarding how to produce more stable pension costs — including cost sharing, conditional post-retirement benefit increases, funding strategies, and reserve funds.