Talk of converting the Teacher Retirement System (TRS) pension plan from a defined benefit plan (DBP) to a defined contribution plan (DCP) has been going on for years. Now, the TRS Board of Trustees has been instructed by the Texas Legislature to evaluate the actuarial and fiscal impact of potential changes to the TRS pension plan, including the creation of a hybrid plan that includes DBP and DCP features (such as a two-part or a cash balance plan). This is evidence that the Legislature is giving serious consideration to actually making this change, possibly during the 83rd legislative session. ATPE strongly opposes the idea of even partially converting TRS to a DCP. Read on to learn why.
A DBP is a plan that guarantees participants a certain benefit for meeting eligibility requirements. This is how TRS currently works. A DCP works more like a 401(k) or 403(b) in which member contributions are invested and subject to market fluctuations. Benefits are paid from investment returns.
The primary argument for converting TRS to a DCP is that it would save the state money during trying economic times. During a recent TRS board meeting, however, several experts refuted that claim. In fact, these experts said that no sound reason exists to make this type of change because the TRS pension system is extremely healthy and that its costs are low when compared with other states’ pension systems or private-sector retirement plans. Mary Beth Braitman, a pension plan design expert with Ice Miller LLP, testified that simply switching from a DBP to a DCP does not necessarily translate into cost savings. She asserted that plan design is the key cost driver, not plan type.
Keith Brainard, director of research for the National Association of State Retirement Administrators, and actuary Joseph Newton furthered the argument against the change by pointing out that TRS has the lowest contribution rate in the nation for teacher retirement systems that do not participate in Social Security (6 percent) and that typical private retirement plans cost employers 9 percent of payroll.
Furthermore, TRS is known as one of the best-funded and best-managed public pension systems in the country. Making unnecessary changes that could jeopardize the retirement of hard-working Texas educators would be unwise. Texas Retired Teachers Association Executive Director Tim Lee had this to say about converting TRS to a DCP: “I am more and more convinced that this is nothing more than a manufactured ‘crisis,’ as I have heard no compelling argument to make (this type of) change.
“TRS has a great model of combining private-sector investment professionals with public servant trust fund members—both active and retired—to manage this fund … and the system’s performance cannot and should not be diminished,” Lee said.
Retirement group sessions
TRS is conducting group sessions for members who are considering retiring on or before Jan. 31, 2013. Attendees will meet with TRS benefits counselors to walk through the retirement process step by step. Find a session schedule and make reservations here.
Questions? Contact ATPE Governmental Relations.