Why Some Teachers Prefer a 401(k) Over a Pension

In 2012, the Michigan Legislature passed a bill that kept open the teacher pension system but began allowing school employees to choose a 401(k)-type defined contribution retirement account.

Since then, around 18,000 school employees have chosen the 401(k) instead of the old pension system, according to a FOIA request. Their reasons for making the switch range from concerns about future pension cuts and underfunding to wanting more control over retirement funds.

“I chose the defined contribution option for a number of reasons. One of which … [is] the pension program is underfunded and may or may not be existent when it comes my time to collect,” said Adam Hastings, a math teacher at Athens High School. “ I also was told that the 401(k)-type option was more portable under the circumstance that I should decide to move to another state.”

School employees do not “vest” in the pension system until they have worked for 10 years, which was also noted by Amy Graham, who works for the Barry County Intermediate School District.

“I work for a grant-funded program and am concerned with how long it takes people to be eligible for benefits,” Graham said.

Having more control over finances and not trusting the state to fully fund the system were two other reasons school employees have mentioned.

“It put me in more control of my own money,” said a science teacher in a rural school in the Upper Peninsula, who did not want to be named. “It seemed like a higher risk/higher rewards type of investment and I figured that I'd like to play the long-term trend in the stock market and hopefully come out ahead. It made me feel more independent and less dependent on the state, which I don't necessarily trust to follow through on all its promises.”

Bridget Weise-Knyal, a paraprofessional with Ann Arbor Public Schools, said she believes Republicans have cut pensions, “making them less reliable.” Michigan’s teacher pension system has not been fully-funded for around 30 years.

“I'm uncertain how long I'll be working in the district and I have always had 401(k) plans or 403(b) plans at other employers and am comfortable with the flexibility and control that affords,” Weise-Knyal added. “I feel it's less vulnerable in the long run. Pensions seem to get targeted for cuts more and more. I do not feel as secure with pensions.”

Around 35 percent of the cost of every school employee currently goes to retiree benefits. The vast majority of that goes to make up for past pension underfunding.

Connie Hamlin, an elementary school teacher at East Leroy Elementary in Athens, has been with the district for 36 years. Three years ago, she opted out of the pension system so that she could have something to leave to her family.

“I’m not married and I found out that if something happens to me, [my pensions] would go back into the system,” Hamlin said. “I just decided I wanted to have something to leave to my beneficiaries. It won’t be tons, but it will be something.”

The state’s school employee pension system, known as the Michigan State Employees' Retirement System (MPSERS),  is underfunded by $25.8 billion. (That’s the difference between how much has been promised to pension system members and how much should have been saved to cover the promises.) Michigan state employees and many local governments have shifted new employees out of a pension system and to a 401(k)-type plan.

The city of Detroit cut pensions for retirees in 2013 after filing for bankruptcy — largely due to an overwhelming debt of pension obligations. Unlike pensions, defined contribution 401(k) accounts go to employees immediately and cannot be underfunded.

The Legislature is currently considering shifting future school employees to a 401(k) to prevent future liabilities and protect current employees and retirees. House Bill 5218 and Senate Bill 102 are in the appropriations committees of their respective chambers.