401(k) eyed to cut cost of Tennessee pensions

photo The Tennessee State Capitol in Nashville.

TENNESSEE RETIREMENTThe Tennessee Consolidated Retirement System covers 217,032 current teachers, higher education employees and state and local government workers. An additional 122,000 retirees are drawing benefits from the system.Source: Office of Tennessee Treasurer David LillardWHO'S IN?Aside from public school teachers, the Tennessee Consolidated Retirement System covers employees from hundreds of local and state government agencies, including:• Hamilton County• Bradley County• Marion County• Rhea County• East Ridge• Collegedale• Signal Mountain• Soddy-Daisy• Lookout Mountain, Tenn.Source: Tennessee Consolidated Retirement System

photo David Lillard

The next generation of Tennessee teachers and state workers could lose the security of a guaranteed pension as state leaders eye a more risky, investment-driven retirement plan.

A bill making its way through the General Assembly seeks to overhaul the state's pension plan, shifting risk from the state to employees through a combination pension and 401(k)-style plan.

Billed as a "hybrid," the proposal comes from State Treasurer David Lillard. He says the state's current plan, though one of the strongest-funded ones in the nation, needs to be changed to ensure long-term sustainability.

If passed, the revised plan would affect only teachers and public employees hired after July 1, 2014. Benefits for current employees and retirees would not change.

But teachers groups fear that such a sea change could keep many from entering or staying in the education field for long. With teacher salaries typically lower than those of other college graduates, a generous pension has long been considered one of the field's strongest financial benefits.

Pension overhaul also has become a favorite cause of education reform groups. They argue for retirement plans that cost taxpayers less and allow teachers to take their benefits with them as they move jobs. Such plans, they say, actually could allow states to pay teachers more.

But Tennessee teachers, who made concessions in reformed tenure and evaluation laws in recent years, are fighting the proposal.

"This is just sort of the straw that broke the camel's back," said Sandy Hughes, president of the Hamilton County Education Association, the local teachers union.

This year, the pension plan cost taxpayers $731 million, The Associated Press reported. And if Tennessee stays with the current plan, state officials estimate that figure could top $1 billion in the next decade.

Unlike the current retirement program, Lillard's proposal would shift funding entirely to employers and employees. State government eventually could save hundreds of millions of dollars as the current retirement system winds down.

In the wake of the Great Recession, dozens of states have sought pension reforms to make up for plummeting investment value. With retirees living longer, stress has multiplied on public employee pension funds, which collectively rack up billions in unfunded liabilities.

More than 40 states have changed their retirement plans in the past five years. To make up for lost investment revenue, some states have increased employer and employee contributions or raised the retirement age. The so-called hybrid retirement plan is becoming more popular, with about 10 states, including Georgia, moving to some fashion of a combined defined-benefit and defined-contribution plan.

And Tennessee could be next.


The state's current retirement plan calculates monthly benefits based on a combination of years of service and earned salary. Retirees are guaranteed that amount for life, regardless of the market.

The new plan still would guarantee some monthly benefit, though it would be about one-third lower than what's currently offered. Benefits from the other side of the retirement plan, set up in the fashion of a 401(k), largely would depend on how much is contributed and how investments perform.

"The employees are kicking in more. The benefit will be less. And the age where they can retire will be older," said Keith Brainard, research director at the National Association of State Retirement Administrators.

Currently, teachers and other workers can retire after reaching age 60 with five years of service or after a total 30 years of service regardless of age. The new plan would tighten the retirement age, allowing workers to retire after reaching age 65 with five years of service, or by accumulating a combined age and service level of 90.

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The state's proposal still would require teachers to contribute 5 percent of their salary toward the pension program. On top of that, an additional 2 percent would be drawn by default to fund the defined contribution side of things -- a rate employees can alter or opt out of entirely. Opting out would mean less in overall retirement benefits, though.

State and higher education employees would see the largest jump in contributions.

They'd have to put in as much as teachers under the new plan, meaning their contributions would jump from nothing to at least 5 percent of their salary.

State officials estimate that employees who contribute more on the front end actually could do better under the new plan.

"I would characterize it as being equivalent or slightly better benefits," said Steve Curry, Tennessee's first deputy treasurer.


Tennessee has one of the nation's top-rated pension plans, with a relatively small funding gap and conservative investing and benefits planning. Every General Assembly and governor since 1972 has funded the plan at the level recommended by independent actuaries, Curry said.

With such a solvent retirement plan, the state's largest teachers union questions why such a drastic overhaul is necessary.

"It has worked exceptionally well. It's an amazing system," said Jim Wrye, government relations manager and chief lobbyist for the Tennessee Education Association. "I think there are significant questions about whether we need this change."

Wrye said teachers likely would agree to some concessions, like the proposed change in the retirement age, but not a wholesale upheaval.

But the treasurer's office is forecasting future woes and says an overhaul of the current system is warranted if it's to remain solvent in the future.

"We are a strongly funded plan, but that's not to mean there are no pressures on our plan," Curry said. "We feel like we need to address this issue before it becomes a real crisis."

For their level of education, Wrye said, teachers take a financial hit compared with other vocations. And a pension is a reward for a career of service.

"They're taking a financial risk for every year they're in the classroom," he said. "But they trade that risk for a guarantee in retirement."

But a traditional defined-benefit package does have limitations. Teachers must usually work in one state for many years or risk losing their full retirement, while private-sector workers can carry their 401(k) accounts across multiple jobs.

The teachers unions fear backlash in recruiting or retention efforts from such a drastic change. But there's little evidence that pensions play a large part in determining a teacher's career choice, said Sandi Jacobs, vice president and state policy director of the National Council on Teacher Quality, a nonpartisan research and policy group that advocates for education reform.

Still, she said, it's important to think about the role retirement benefits play as a big piece of a teacher's overall compensation package.

"I think it's a double-edged sword," she said. "Because on the one hand, while teachers have enjoyed this defined-benefit retirement, the amount of money that goes toward those retirements has, I think, kept teacher salaries lower than they might otherwise be."

Contact staff writer Kevin Hardy at khardy@timesfree press.com or 423-757-6249.