Q. I’m a fairly young/new teacher in North Carolina and my more seasoned colleagues are very upset about some pending changes to the state retirement system. I don’t understand it all but they are saying it’s not worth working for the state if they take away the pension system. They say there is talk about replacing the pension with something called a defined contribution plan. Do you know anything about this and is it really anything about which to be concerned?
A. I hadn’t heard of any changes but I spoke with Richard Rogers, Executive Director of The North Carolina Retired Governmental Employees Association (NCRGEA) and he said there are possible changes on the horizon which would impact North Carolina teachers and state employees. He said that some House and Senate members have suggested changing the Teachers’ and State Employees’ Retirement System to a defined-contribution system/plan. The current system is a defined-benefit system/plan.
First you need to understand the differences in the two types of plans. In most state run defined-benefit plans, an employee puts a percentage of his or her income into the pension program, and the state or local government contributes a percentage of the employee’s salary into the retirement system. These funds are invested by the State Treasurer and pensions are paid from those investment earnings. You have no or very little say in how these monies are invested. In North Carolina, employees are required to contribute 6 percent of their salary and according to Mr. Rogers, the State contributes 9.15 percent of the employee’s salary to the plan (the State Employee handbook lists 15.32 percent as the State’s contribution rate for 2015-2016 but this includes a benefit for health, disability and death).
In the private sector most of these plans are completely funded by the employer. This type of plan promises you a set payout (pension) when you retire based on your salary and years of service. You usually have to have been employed full-time for five years to qualify for a benefit. If you have less than 5 years of service when you terminate employment and you have made contributions to the plan, your contributions and a certain amount of interest will be returned to you. With these plans you know what your payout in retirement will be based on a formula which is typically a percentage of average compensation times years and months of creditable service.
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In a defined-contribution system/plan, the amount an employee has at retirement depends on how much his or her employer contributes to the plan, how much the employee saves in the plan, how long the employee leaves those funds invested and how well the investments perform. Once retired, future benefits are not guaranteed and will continue to fluctuate based on the performance of the investments in the plan. With a defined contribution plan, the investment risks and rewards are ultimately assumed by the employee. The State of North Carolina currently offers this type of plan (401k, 457, 403b) but there is no matching contribution from the State.
Rogers says that “while no change has been confirmed at this time, this issue is still of great concern for the over 63,000 members of NCRGEA. Our current defined-benefit system means a secure pension for eligible retirees, which encourages dedicated, quality candidates to seek employment with the state and local government,” adds Rogers. “If the legislature changes to a defined-contribution system, our state will struggle to attract and retain top talent, and all North Carolinians will be affected.”
Over the past two decades, many private sector companies have eliminated their defined benefit plans and only offer defined contribution plans for retirement savings. They usually provide some level of matching contribution and some provide an additional profit sharing contribution as well. I agree that the state needs to be competitive to attract quality employees and if the State does eliminate the defined -benefit system they would need to enhance the defined contribution plans that are currently in place.
For more information on NCRGEA’s stance on the state retirement plan, please visit www.ncrgea.com.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624