Teacher Pensions Blog

In the retirement world, the Florida Retirement System (FRS) is often held up as a model for other states. But while it is in better shape than most other states, Florida could still do more to help  its teachers save for retirement.

Florida is often praised on two fronts. First, compared to other states, it has managed its finances reasonably well. FRS has a funded ratio of 84 percent, compared to 73 percent for the median plan nationwide.

Second, Florida has been a leader in providing employee choice and portability. Beginning in 2002, it allowed new teachers to choose between a traditional pension plan or a portable defined contribution plan, called the FRS Investment Plan. After realizing that the portable option was likely the best choice for most teachers, in 2017 Florida shifted the default to automatically enroll new teachers in the FRS Investment Plan, while still allowing incoming teachers a choice over which plan was best for them.

However, the FRS Investment Plan has one critical flaw. Namely, its contribution rates are too low.

As of this school year, the official employer contribution into the FRS Investment Plan for “regular employees” like K-12 teachers is listed at 8.47 percent, but only 3.3 percent actually goes into member accounts. The state takes out a chunk for paying off the pension plan’s unfunded liabilities (3.56 percent of each teacher’s salary), a portion goes toward retiree health benefits (another 1.66 percent of salary), and assorted administrative fees make up the remainder.  

Combined with a mandatory 3 percent employee contribution, that means Florida teachers are saving 6.3 percent of their salary toward retirement. Even with Social Security on top, that won’t be enough for most workers. Experts generally recommend that workers save at least 10-15 percent of their annual salary every year while they work in order to afford a comfortable retirement.

It’s possible that Florida teachers are making up the difference on their own, through 403(b) accounts or IRAs or other investment vehicles. But why doesn’t the state set up its teachers for success, rather than leaving it to chance?

The simplest way to do that would be to raise the default employee contribution rate to 5 or 7 percent instead of its current 3 percent. Many teachers would simply follow the default, but the state could allow anyone who wanted to lower their contribution rates back down to 3 percent to do so.

Even if Florida didn’t want to “nudge” teachers in this way, they could at least allow teachers to save more through the FRS plan. Florida teachers seem to like the FRS Investment Plan—and they should, it’s well-run, offers low-cost mutual funds, and features annuity options to help workers spend down their assets in retirement—but they aren’t allowed to save more in FRS even if they want to. Again, Florida teachers may be putting aside additional money elsewhere, but the 403(b) market is rife with bad actors selling teachers high-fee insurance plans. Just by opening up its own plan, Florida could make its teachers better off.  

Florida policymakers have already taken several steps to boost the retirement security of its teachers. But a few more tweaks could help even more.