MPSERS | Michigan Association of School Administrators

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The Michigan House and Senate have passed two bills designed to reform the state’s education retirement system (MPSERS). The legislation – HB 4647 and SB 401 – reduces pension benefits for new education hires, while increasing those benefits associated with a defined contribution 401(k) alternative program. In essence, the bills serve the purpose of shifting investment risk from the state to employees by driving new hires into the 401(k) plan.

History of MPSERS Reform

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MPSERS – the Michigan Public School Employees Retirement System – provides retirement services and benefits for more than 200,000 retirees and beneficiaries through both the Hybrid “Pension Plus” Plan and a Defined Contribution program.

MPSERS was established in 1980 through the Public School Employees Retirement Act (PA 300), and has undergone many revisions over the years. Most recently, reforms made in 2010 strengthened the financial health of MPSERS by paying down debt and reducing future obligations.

The Pension Plus plan, more commonly known as the Hybrid Plan, includes both a defined benefit component as well as a defined contribution 401(k)-style component. The Hybrid Plan was introduced in 2010 in response to the rising UAAL, allowing both employees and employers to share the risks associated with retirement investments. All new employees hired after July 1, 2010, are placed into the Hybrid Plan (unless they opt out and choose to use the optional 401(k) or 457 plans that were created in 2012).

Unlike the outmoded Basic Plan and MIP, the Hybrid Plan has a total zero unfunded liability. Since its inception, the plan has had a 100% fund balance (compared to the roughly 60.5% funded legacy direct benefit programs), often exceeding 100% and allowing excess returns to be used to pay down the existing liability from the older plans. 

As new employees enter into the Hybrid Plan, they begin to accumulate retirement benefits of their own. According to the Office of Retirement Services (ORS) within the Michigan Department of Technology, Management, and Budget, these new benefits (and subsequent employee contribution into the system) are of vital importance to state’s ability to pay down the $27 billion existing UAAL.

ORS estimates that any proposal eliminating the Hybrid Plan as an option for new school employees in favor of a defined contribution plan would increase costs to the state in three ways:

  1. Initially, such a closure would cause the total amount of unfunded liability to drastically increase, given that most of the benefits received by retirees and beneficiaries are derived from new contributions into the Hybrid Plan. If the plan was closed to new members, contributions into MPSERS would need to increase in order to preserve the fund’s principal over the long term.
  2. In much the same way, the second increase in costs would come from a need to greatly accelerate UAAL payments. Again, without the asset pools of new members to draw on to pay for the inherited liabilities of the older plans, the UAAL would need to be funded at an increased rate.
  3. Finally, in order to provide “adequate” benefits through a defined contribution alternative, normal operating costs would be 67% higher than the Hybrid Plan. These higher normal costs are well documented, and not limited to Michigan. A study by the National institute on Retirement Security found that the direct benefit plans were safer and produced greater returns than defined contribution models, with the latter costing 48% more nationally.

Sources

  • MPSERS – New Hybrid and DC Plans, House Fiscal Agency (June, 20, 2017)
  • Impacts of Closing the Hybrid Plan, ORS (August, 2016)
  • Close MPSERS Hybrid Plan and Replace with Defined Contribution, House Fiscal Agency (May 24, 2017)
  • Michigan Public School Employees’ Retirement System (MPSERS), House Fiscal Agency (October, 2016)
  • A Look at the History of MPSERS…, M-Live (April, 2012)

Last Edit Date: 6/23/17