The Ohio State Teachers Retirement System offers a mix of retirement plan options to newly hired teachers, including a defined contribution retirement plan. This analysis reviews this plan’s major design features and efficacy for employees’ retirement.
In this analysis, we’ve used the leading best practices from our 2022 Reason Foundation study, Defined Contribution Plans: Best Practices in Design and Utilization, which outlined a set of design gold standards as a measure of the plan’s effectiveness.
Overall, the Ohio State Teachers Retirement System’s defined contribution retirement plan meets best practices in most areas but needs some improvement in other areas.
Summary of the Ohio STRS DCP
The Ohio State Teachers Retirement System’s (STRS) defined contribution retirement plan (DCP) is one of three retirement plan options provided to teachers hired on or after July 1, 2001. New teachers are provided a choice between the standard defined benefit pension (DB), the defined contribution (DC) retirement plan, or a hybrid defined benefit/defined contribution (combined plan) alternative. The choice must be made within 180 days of covered employment. If no election is made, the default plan is the defined benefit plan. If the defined contribution retirement plan or hybrid DB/DC combined plan is elected, there is a window in the fifth year of coverage to change back to one of the alternative plans.
The DCP is a participant-directed Internal Revenue Code Section 401(a) money purchase pension defined contribution plan with employer contributions of 11.09% of annual salary and teacher contributions of 14.0% of annual salary for a total 25.09% contribution rate. The vesting schedule is 20% per year, with full vesting after five years.
Of note, Ohio STRS members do not participate nor contribute to the federal Social Security program.
Definition of Plan Benefit Objectives
The purpose and objectives of the Ohio STRS DCP are addressed partially in Ohio Revised Code Section 3307.81, which directs the Ohio STRS retirement board to create the DCP and allows the board to include in the plan design regulated investment trusts, pooled investment funds, annuities, variable annuities, life insurance, and other forms of investment. The authorizing statutes do not appear to provide any additional statement of plan objectives or purpose to guide the STRS retirement board in the design of the DCP.
The STRS retirement board has issued a set of board policies that state the purpose of the board is to ensure that statutorily defined current and long-term retirement and other benefits services are provided to covered teachers and beneficiaries.
The DCP plan document mirrors the statutory language about the allowed investments the retirement board may make available but does not contain a formal benefit policy objective statement.
Ohio STRS DCP Partially Meets Plan Objectives Best Practices
The Ohio STRS DCP partially meets the best practice standard that clear statements be made articulating the benefit objectives and purposes for the plan regarding retirement security and employee recruitment and retention. While retirement benefit security is indirectly addressed in the authorizing statutes, board policies, and the program design as described in the plan document, there is no formal and clear statement that the DCP is intended to deliver lifetime retirement income to members and beneficiaries.
Communication and Education
The Ohio State Teachers Retirement System provides various communication and education services available to eligible teachers, covering the essential areas of initial plan choice, benefit comparison charts between the plan options, and benefit projection calculators. Communication and education services include web-based resources, brochures, videos, summary plan descriptions (SPDs), group seminars and meetings, individualized counseling, and other guidance offerings.
The initial DB/DC/combined plan choice materials on the STRS website are primarily self-serve, and new teachers must go through each plan’s benefit projection modeling tool separately using their scenarios. The plan choice modeling tools allow comparison of projected lifetime income from each, which is the preferred practice. The benefit projection modeling tools are not highlighted in the overview materials or located in a single place that allows easy access. Benefit projection modeling on a side-by-side basis is not provided for easy comparison by new employees.
The benefit plan comparison charts clearly outline what is provided and what is not under each plan choice. However, the charts do not include the employer and employee contribution rates. These are described separately under each plan option.
DCP participants have access to online and call center services to assist with managing their retirement planning, investments, and distribution planning, including the “My Interactive Retirement Planner” tool provided by the plan recordkeeper.
Meets Best Practices for Education and Communication
The Ohio STRS DCP provides a wide range of participant education and communication materials and services covering all aspects of initial plan choice, accumulation period tracking and planning, investment management, and distributions during retirement. The benefit comparison charts should be modified to include the benefit accrual and contribution structures and amounts. A more robust side-by-side initial plan choice benefit projection tool for different life career paths should be considered.
New employees are automatically enrolled in the Ohio State Teachers Retirement System with a 180-day window to choose the DB, DCP, or combined plan. Those who do not make a selection default into the defined-benefit pension plan. Those who choose the DCP have mandatory employee and employer contributions directed into an age-appropriate target date fund until the employee makes a positive election.
Does Not Meet Best Practices on Enrollment
Having new members who do not make a plan selection automatically enrolled in the defined benefit plan is not in line with best practices. The defined contribution plan would better suit most new hires and should be the default.
Given that Ohio STRS teachers do not participate in Social Security, total contribution rates of 25.09% (11.09% employer and 14% employee) are adequate to fund a retirement benefit that should enable a retiree to maintain their standard of living following a career of employment.
Meets Best Practices for Contributions
The total employer and employee contribution rate of 25.09% meets the best practice standard for non-Social Security employees of between 18%-25% of covered compensation.
Retirement-Specific Portfolio Design
The DCP offers participants a broad array of 17 investment choices covering the spectrum of risk and return asset classes, as well as real estate and target date fund (referred to as “Target Choice”) options. The Target Choice options include five alternative personal risk profile choices ranging from conservative to aggressive. The default investment is an age-appropriate Target Choice fund. A member cannot purchase or invest in annuity options while working, but they can purchase a lifetime annuity option offered by the plan after retirement.
Partially Meets Best Practices on Portfolio Design
The DCP investment menu provides an appropriate range of choices covering a wide risk and return spectrum. It includes pre-built target date accounts for those who prefer to avoid managing their asset allocation. Some improvements could be made by offering accumulation period annuity options.
Accumulations attributable to employee contributions are immediately vested. Accumulations attributable to employer contributions are gradually vested over five years. Vesting of employer contributions is pro-rated, from 20% vested per year until full vesting after five years. The portability feature is strongly emphasized in the employee communication materials.
Partially Meets Best Practices for Portability
Full and immediate vesting of employer contributions would be preferred to meet the needs of today’s more mobile workforce. The 20% per year vesting schedule partially meets this best practice standard.
The DCP makes various distribution options available, ranging from leaving the assets in the plan to various fixed-period and lifetime annuities.
Meets Best Practices on Distribution
The distribution offerings meet best practices by including both standard lump sum and periodic payment options and, importantly, lifetime annuity options.
The DCP members are not eligible for any disability benefit under STRS. The DB and combined plan options do provide a disability allowance. Under the combined plan, 2% of the participant’s 14% contribution is used to purchase a disability allowance. There is no similar provision under the DCP.
Does Not Meet Best Practices on Disability Coverage
The absence of a disability benefit is an important missing feature protecting participants in the DCP. One option is to allocate 2% of the employee contribution for this purpose in the same manner as exists under the combined plan.
Among public worker retirement systems, the Ohio State Teachers Retirement System is a national leader in flexibility and choice. The ability of each new teacher to choose the retirement structure that works best for them gives STRS a notable advantage in serving a wider variety of preferences and post-employment plans. The Ohio defined contribution plan meets most of Reason Foundation’s best practice standards for defined contribution plan design, particularly the focus on providing lifetime income solutions.
The Ohio State Teachers Retirement System should consider improvements in some areas, including:
- Providing a shorter vesting schedule;
- More robust benefit comparison and projection scenarios for new employees for making their initial plan choice; and,
- Providing a disability benefit for those who choose the DCP.
Most notably, Ohio policymakers should consider making the defined contribution plan the default plan for new hires who do not make a selection since this is the most advantageous option for most teachers, who aren’t likely to remain in the system for decades.
For more information and an in-depth scorecard summary, please see Reason Foundation’s evaluation of the Ohio State Teachers Retirement System’s defined contribution plan.
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