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House advances bill for offering 401(k)-style retirement plan to new teachers

March 2, 2017

The Indiana House on Monday approved a plan to allow new teachers in the state to opt into a 401(k)-style retirement plan as an alternative to the current pension-style plan already offered to teachers here.

Supporters say giving teachers the choice of either the defined-contribution plan or the default defined-benefit plan would give them flexibility, because teachers would be fully vested in the 401(k)-style plan after five years. Under the current pension-style plan, teachers aren't vested until 10 years.

Authored by Rep. Martin Carbaugh, R-Fort Wayne, the bill passed the House by a vote of 68-25 and headed to the Senate for debate.

Carbaugh said his plan is intended to help “a much more fluid generation,” because young people are bound to have many jobs during their careers.

“Hopefully teachers love [the profession] and they stay,” Carbaugh said. But his plan would “help them have an option out there” if they don’t.

Critics have said they fear that offering the plan would run counter to the state’s goals of recruiting high-quality teachers for the long-term.

“Indiana’s teachers have earned a better retirement, one that is secure and dignified,” said Tom Mellish, executive director of the Indiana Retired Teachers Association. “Allowing or encouraging people to take the money and run is counterintuitive to … addressing the teacher shortage.”

Currently, teachers participate in a so-called “hybrid” plan under the Indiana Public Retirement System. Part of it consists of a defined benefit commonly known as a pension. The employer pays 100 percent of the contributions into the account and teachers are eligible to receive a monthly benefit for life starting at age 65 with 10 years of service.

Teachers also have access to an annuity savings account under the hybrid that can be funded by employees or employers.

Under Carbaugh’s plan, teachers new to the system could choose the traditional hybrid plan or the 401(k)-style account. A teacher’s employer would be required to contribute an amount equal to approximately 6 percent of the teacher’s salary to the new defined-contribution plan, and teachers could contribute up to 10 percent of their salary.

The bill would also allow teachers to change their minds after three years and use the pension-style plan going forward.

The nonpartisan Legislative Services Agency estimates the bill, if passed, would result in $1 million in extra expenses to the Indiana Public Retirement System to update its systems to allow each school corporation to offer the plan.

Carbaugh said the plan could also help a teacher who doesn’t want a pension, because pensions are not inheritable.

“They want to build up a savings account to pass on to the next generation,” Carbaugh said.

Rep. John Bartlett, D-Indianapolis, responded that he doesn’t think those people “could create generational wealth off of a teacher’s salary.”

Gail Zeheralis, director of government relations for the Indiana State Teachers Association, said, “I have not had a single member in all these years ask me for this.”

“I’m going to ask you to put yourselves in the seats of our members. [There is] justified concern that this is the nose of the camel under the tent,” she said, alluding to a possible phase-out of the current system.

Carbaugh said the groups’ concerns about an eventual phase-out of the current hybrid plan are unwarranted. He said he “would never vote to get rid of it,” and that “this plan would not hurt any teacher currently teaching.”

“There’s no alligators in the mud puddle,” Carbaugh said. “[They’re] criticizing things not in the bill … [and] seeing things that don’t exist.”

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