States can learn from pension plan design colleges and universities use for professors

Citing growing challenges in recruiting and retaining teachers and public workers, several states have considered rolling back previous reforms made to deal with failed defined-benefit pension systems. However, there is little reason to think that bringing back antiquated defined-benefit public pension plans would better help state governments recruit employees in a tight job market. Instead of trying to turn back the clock, state policymakers should look to the innovations of their own higher education systems to learn how to build retirement plans that can actually be used as recruiting tools.

Higher education institutions in the United States have long understood that their critical mission has been enhanced by continually bringing in new professors with different ideas and teaching methods. This ongoing renewal of the workforce has kept the learning environment fresh and the institutions themselves viable. However, early 20th-century public pension systems were not structured to recognize this academic mobility, so new retirement systems were designed and implemented to meet several key objectives. The first goal was to support the movement of academics between colleges and universities without the loss or interruption of future retirement benefits. A second key objective was to ensure secure lifetime retirement income for individuals following a career of employment regardless of the number of employers they worked for during their careers.

The resulting retirement plan design was based on defined contributions (DC) and included low-cost, individually-owned deferred annuities as the embedded investment vehicle. The individual ownership of the investment contracts enabled the needed portability between institutions. Even when employees moved to new jobs with different retirement plans, the assets in the individually-owned contract continued to gather investment returns and were available for later retirement income.

When professors made it across the finish lines of their careers, the assets from the contracts were distributed as lifetime income with built-in guarantees. The employer maintained the retirement plan itself and generally required that the individual participants and the employer alike make contributions. Some plans were noncontributory, meaning that the employer made the entire contribution, but most required employees to pitch in.

In the middle of the 20th century, additional investment options were added to address inflation risk. Eventually, more investment choices were included, and distribution options, in addition to lifetime income, were added to increase individual control. Building on the foundation of individual contracts and lifetime income, the national higher education retirement system network is very much alive today and has arguably been the most successful retirement network in the country for well over a century. After all, have you ever read about a ‘retirement crisis’ for college professors? 

In his 2006 book, A Country That Works, Andy Stern, then-president of the Service Employees International Union (SEIU) and founder of the Change to Win Federation, cited the need for a new type of retirement plan for the country. His plan included several key components: guaranteed and predictable employer contributions, no withdrawals during one’s working life, guaranteed lifetime benefits and limited cash-out, matching employee contributions, portable accounts, and pooled investment risk. In the book, Stern asks, “Is this type of new American retirement system a pipe dream?” He goes on to cite the higher education system that had been in existence for decades before his writing as a potential model.

While higher education retirement plans were developed to meet the needs of a then-unique group of university employees, today’s reality is that most public workers, not just professors, now have multiple employers during a working career. A traditional defined benefit pension, designed to reward long-service employees and act as a punitive employee retention tool, is the wrong choice in the modern world. In fact, with the dramatic increase in work-from-home employment, where employees can change employers and jobs without ever leaving home, the defined benefit pension is increasingly ill-suited to meet today’s retirement needs.

The higher education retirement approach is a defined contribution construct but is very different from the typical 401(k)-style plan that became popular in the private sector. When corporations moved away from defined benefit plans due to the failure to meet employee needs and the financial strain of growing unfunded liabilities, they often used their existing 401(k) supplemental savings plans as the new primary retirement vehicle by adding an employer contribution. This misguided approach ignored several key elements of sound retirement plan design, including a commitment to adequate contributions and lifetime income protection. While there has been some dilution in proper design over the years, the higher education model addressed each of these key components.

The Pension Integrity Project recently introduced a new retirement plan design called the Personal Retirement Optimization Plan, or PRO Plan. This enlightened new approach addresses the retirement portability needs of the modern workforce and—like the plans found in higher education—is focused on providing appropriate lifetime income. It even goes beyond the higher education model by using sophisticated financial technologies and tools to tailor the plan to meet specific individual situations. 

The adoption of DC plans with income options, unlike the typical 401(k) design, is already happening in several states, making these plans look similar to traditional higher education plans. The next evolution in retirement plan design will recognize that not all individuals in seemingly similar situations (e.g., similar ages or incomes) have the same financial needs. Differences in family assets, sources of income, and other factors suggest that retirement plans should have the flexibility to approach a wide variety of situations with products that are largely available already in the financial marketplace today.

No single type of retirement plan will completely solve an employer’s recruitment and retention challenges. This is true for defined benefit and defined contribution plans. If, however, an employer builds a flexible and portable retirement plan and communicates that plan as part of a recruiting package, it may help. That employer can cast a wider net and improve the chances of appealing to a wider pool of prospective employees. If employers are to optimize their ability to attract quality workers, modern public retirement plans need to reflect realistic employment patterns, focus on income replacement, and meet individual needs. Going back to old defined-benefit pension plans is not the answer.