Teachers in Indiana scored a victory last week when a controversial bill that would have made harmful changes to their state pension was defeated. House Bill 1004 died in the state senate due to a lack of support. While HB 1004 contained several controversial education-related provisions, the pension-related provision would have allowed school districts to offer new employees a defined contribution 401(k)-style retirement plan.
We’ve documented many times how defined contribution 401(k)-style plans fail to provide retirement security to teachers and other public employees. Defined contribution plans earn lower investment returns and have higher management fees than defined benefit pension plans. 401(k)-style plans are also unreliable. Since an individual is responsible for managing their own investments in a 401(k)-style plan, they also bear all the risk and could lose everything if the financial markets take a downturn right before a planned retirement. Many individuals also lack the financial knowledge to know how much to save for retirement and many are beginning to discover they do not have enough saved for retirement.
Defined benefit plans- like the state pension plan for teachers in Indiana- offer a much more reliable and secure retirement than a defined contribution plan. State pension plans pool risk collectively among thousands of individuals so no one person bears all the risk of a market downturn. Pension plans are also “eternal” in the sense that as some members retire and collect the benefits they earned, new members join and begin paying into the plan. Researchers who have studied defined benefit pension plans for teachers in other states, like California, have found that the state pension plan offers much greater retirement income than defined contribution 401(k)-style plans can. Furthermore, there is evidence that teachers, who typically face low pay, are willing to forego pay increases in exchange for the benefit of a secure retirement.
The defeat of HB 1004 in Indiana was a win for teachers there. Allowing school districts to offer defined contribution 401(k)-style plans to new hires not only harms the retirement security of those new teachers, but weakens the state pension plan for all teachers. State legislators in the Hoosier state should see the value in offering retirement security to their teachers and other hard-working public employees and reject any further attempts to harm state pension plans.