Fears About State Pension Underfunding Drive School Employees to Other Options

For every dollar Michigan school districts budget to pay their employees, 36 cents goes into the state-run school retirement system. Most of this money (87 percent) goes toward catching up on decades of systematic underfunding that has left the pension system with a massive unfunded liability.

The system is called the Michigan Public School Employees Retirement System (MPSERS), and it is currently underfunded by $26 billion. The potential for instability contributes to thousands of school employees choosing to skip the traditional defined benefit pension and instead take advantage of employer contributions into an optional 401(k)-style account they then own.

Michigan Capitol Confidential reached out to employees who made this choice to get their reasoning for doing so. This is the second story in this series; part one is here.

Chris Nuckels, who works in technology for Traverse Bay Area Intermediate School District, said he and his wife, a teacher, chose the 401(k) “because we wanted something more stable and movable.”

“I can’t trust Lansing to maintain funding for the pension or not cut parts of it out,” Nuckels said. “The 401(k) allows me to maintain my own retirement. If I ever leave the school system to work in private industry, I also have something that can move with me.”

James Kiurski, an English teacher at Brimley Middle School in the Upper Peninsula, is worried that the state pension system won’t be there for young teachers like himself. He called the 401(k) “an easy choice for me.”

“One of the main reasons I chose the 401(k) option is because, simply put, I was very skeptical that all the money I would have paid into the pension fund would be there for me to draw on when I retired,” Kiurski said. “I don't see how, continuing on the current path, any money will be left for current teachers (especially those just starting their careers) by the time they get ready to retire. In addition to this, I feel like the investment options available to me are greater and I think I can do a better job managing my money than the state can do for me. There is more risk involved, but being so young, I am in a position to absorb that risk whereas many more experienced teachers may not be.”

Other teachers also felt that accounts in the defined contribution plan, which are controlled by employees, were the better deal.

“I consulted my financial adviser about what I should do,” said Jacob Kidder, a math teacher in Bloomingdale Public Schools. “He said that as long as I thought I was staying in the teaching profession for my career that I should put my money into the 401(k).”

Many school employees are drawn to the flexibility that comes with 401(k)-type plans. In Michigan, employees do not receive the gains from pension plans unless they stay in the system for at least a decade.

Rick Mason is an assistant principal at Belding Middle School but began his career in Florida.

“I am not sure that I will stay in Michigan for the remainder of my career, as I could very likely return to Florida or move to another state,” Mason said. “I was told that unless I plan on being in the system for the entire 30 years, that the 401(k) option would be better for me. “

George Nastas III is a finance and economics advisor who manages investment portfolios. Nastas said 401(k) accounts have several advantages over pensions.

"A big plus of defined contribution plans (401(k)s, IRAs) is that ... the employer's contribution belongs to the employee," Nastas said. "Add the employee contribution and a long period of time with regular employer and employee contribution over time and a nice balance can build up (given a good investment plan). Plus beneficiaries can receive/inherit the [money]."

Bills currently pending in the House and Senate Appropriations committees would shift all new school employees to a 401(k) with a state match, capping the state’s liabilities. They are House Bill 5218, sponsored by Rep. Tim Kelly, R-Saginaw Township, and Senate Bill 102, sponsored by Sen. Phil Pavlov, R-St. Claire.