Tennessee’s Road to Public Pension Plan Success

State officials explain the importance of outreach and education around retirement readiness

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Tennessee’s Road to Public Pension Plan Success
A birds eye view of the Tennessee State Capitol building in Nashville, Tennessee
Malcolm MacGregor 2012 Malcolm MacGregor Photography

In fiscal year 2020, America’s state public pension systems collectively met a crucial benchmark for minimum pension contributions for the first time since 2001. The discipline shown by states and plan administrators over the past decade to meeting or exceeding annual contribution targets has set the stage for improved long-term fiscal sustainability for state pension plans.

To continue this trajectory, state policymakers must continue to make scheduled contributions, which in turn requires a plan to address future fiscal uncertainty from volatile investment markets. Some state pension systems, notably those in Wisconsin, South Dakota, and Tennessee, have maintained high funded ratios at predictable costs over the past 20 years in part because they have strategies—including policies that target debt reduction while sharing gains and losses with workers and retirees—to mitigate cost increases during economic downturns.

These three states, in particular, have delivered stability and sustainability through the economic ups and downs of the past 20 years. And although these states’ plans rely on different benefit designs, they share several exemplary characteristics, including a path to retirement security for all workers within clearly defined cost targets; a plan for managing risk; and a commitment to ensuring that policies are transparent and clearly communicated to stakeholders.

The Tennessee Department of Treasury administers the retirement program, known as RetireReadyTN, for the Volunteer State’s state and higher education employees, K-12 public school teachers, and the employees of nearly 600 participating local government entities. The system includes a defined benefit plan provided by the Tennessee Consolidated Retirement System (TCRS); the state’s deferred compensation plans; and retirement readiness education for members at all career stages.

This interview is with State Treasurer David H. Lillard Jr.; Jamie Wayman, director of the Tennessee Consolidated Retirement System; and Ashley Nabors, assistant treasurer for financial empowerment. This is the second in a series with representatives from the three states about the factors that contribute to their pension systems’ success.

The interview has been edited for length and clarity.

David H. Lillard Jr.
Courtesy of the subject
Jamie Wayman
Courtesy of the subject
Ashley Nabors
Courtesy of the subject

Q. Tennessee’s public pensions have been well funded for decades. So what did you hope to achieve by the major changes that you made to your retirement program almost 10 years ago, which included adopting a hybrid plan design for new workers?

Lillard: Tennessee’s hybrid retirement plan consists of a pension component and a separate defined contribution or 401(k) savings account. And the goal of the plan, which went into effect in 2014, was to control pension costs and unfunded liabilities for employers by stabilizing annual employer rates while providing a sustainable, sufficient, and cost-effective retirement plan for its members.

Wayman: We wanted the hybrid plan to provide members with a retirement package capable of producing a comparable benefit to what they had under the previous plan, which was a defined benefit plan in which the retirement benefit was determined using a formula based on the worker’s final average salary, years of service, and a 1.5% benefit accrual factor. The hybrid plan lowers the accrual factor for the defined benefit plan to 1%, but employees can make up the difference through the 401(k) plan.

Q. What problem were you trying to solve?

Wayman: Our state fully funds the actuarially determined contribution (ADC) rate, which means that the state regularly puts into the retirement system the amount that financial experts calculate must be contributed for the state to be able to fully and timely pay promised benefits to members. But we found that big swings in the ADC rate, due primarily to market conditions, from a low of 3.65% of salary in 1998 to 15.03% of salary in 2014, left employers with significant fluctuation in the amount they had to budget from year to year.

Lillard: The hybrid plan fixed employers’ annual contribution rates at a combined 9% of payroll: an employer contribution rate of 4% of payroll to the defined benefit component and an employer contribution rate of 5% of salary into members’ 401(k) accounts.

Q: What effect did the changes have on pension costs and unfunded liabilities?

Wayman: According to Tennessee Treasury estimates, since 2014 the Hybrid Retirement Plan has saved the state $482.6 million between what would have been contributed if the previous plan had remained in place for new workers and what was actually contributed—all while continuing to fund the retirement benefits of more than 26,000 state and higher education employees.

This estimate reflects savings for state employees only. It doesn’t include the additional savings from funding the retirement of nearly 30,000 K-12 public school teachers and the employees covered by local governments that have adopted the hybrid plan since 2014.

Q: Tennessee’s funding policy also has an innovative feature: a reserve fund that’s designed to keep costs stable. Can you tell us a little more about it?

Lillard: As part of the hybrid retirement plan, the state established the Stabilization Reserve Trust Account, which serves as a reserve fund designed to stabilize annual employer contribution rates.

In years when the ADC is lower than the 4% statutory contribution rate, the Stabilization Reserve works as a pool into which the state deposits the difference between the ADC and the contribution rate. Then, in years when the ADC exceeds 4% of payroll, the Stabilization Reserve is used to reduce the state’s contribution to the defined benefit plan.

Q: What other tools do you use to stabilize employer contribution rates?

Wayman: The Stabilization Reserve Trust Account is just the first cost control established as part of the hybrid plan. The other mechanisms kick in based on an established sequence when the plan’s unfunded liabilities exceed the thresholds established in the plan document.

The second cost control—reducing the maximum 3% retiree annual cost of living adjustment—would be triggered if the Stabilization Reserve Trust Account were exhausted.

If those reductions don’t improve the state’s funded status, the next cost control to kick in would shift at least some of the 401(k) employer contributions to the defined benefit plan. And then, if this control is insufficient to restore the plan to full funding, additional cost controls will be enacted, including an increase of 1% of payroll in employee contributions to the defined benefit plan, a reduction in the multiplier for future service and accruals, and a freeze of the plan with no future service accrual.

Q. Tennessee’s retirement system also now includes a retirement readiness program, right? 

Nabors: Yes, the retirement readiness educational component, along with the state’s retirement plans, make up RetireReadyTN, the state retirement program. The retirement readiness programs are available to members at all career stages and use an array of available resources to help educate members about retirement.

Q: Tennessee stands out among the states by helping public workers plan proactively for retirement. How do you do that? 

Nabors: We use a metric called The Lifetime Income Score (LIS) to measure how financially ready members are for retirement. The score provides a snapshot of the percentage of income that working individuals can expect to replace in retirement and gives them access in one location to information on what may be various sources of retirement income. It was developed by Empower Retirement, a private-sector company that provides deferred compensation recordkeeping and participant education services for RetireReadyTN.

In 2020, we worked with Empower Retirement to improve the online tools available to members, including integrating TCRS benefit information into the tools.

The LIS incorporates members’ projected TCRS benefit along with savings and any employer contributions into 401(k) and 457 plans, plus any Social Security benefit, into their retirement score. It uses a member’s current savings rates, investments, and defined benefit projection data to calculate what percentage of their working income they’re on track to replace in retirement.  

Q: How else do you help to prepare members for retirement?

Nabors: Through our recordkeeper, we have one dedicated call center to assist members with both their defined benefit and deferred compensation accounts. Combining assistance for both plans into one call center’s services is more convenient for members, and it lets us offer more comprehensive help.

Our members also have access to 16 dedicated retirement plan advisers throughout the state. These FINRA Series 6, 63, and 65 licensed advisers can meet with members at any stage in their career to review their retirement plans—and their assets outside of the plan—and provide tailored investment advice and recommendations to achieve their goals. The Series 65 advisers are fiduciaries and must act in the best interest of the participant. They are able to provide investment and general financial advice to clients.

It’s important to us that members get complete and holistic information about each state-sponsored retirement plan account every time they interact with the RetireReadyTN program, whether that interaction is through our call center, a meeting with a retirement plan adviser, or through an email from us that reminds them to review their account beneficiaries.

Q: Do you know how many members have taken advantage of the system’s educational outreach?

Nabors: In 2021, more than 165,000 members called our call center, and retirement plan advisers conducted 15,720 one-on-one meetings with members.

Q: Do you think this education and information campaign has had a discernable effect?

Nabors: After TCRS information became available to members through their online accounts, we saw lifetime income scores increase significantly across the plan, from an average LIS score of 29%—the percentage of their current income they can expect to replace in retirement—to an average score of 62.24%. That means that employees were better prepared financially for retirement. In addition, our campaign to communicate these online improvements to members resulted in a 62% increase in traffic to our website.

Q: Of course, the scores also tell us that some plan members are at risk of not meeting their retirement goals. How do you reach them?

Nabors: Last year, we began focusing on several at-risk populations: members with a LIS below 70%, hybrid plan members who have opted out of 401(k) auto-enrollment, and members whose deferred compensation investment portfolios indicate potential equity or inflation risk based on their age.

We use targeted email campaigns to reach these at-risk groups and encourage them to schedule a meeting with one of our retirement plan advisers—who also proactively reach out to at-risk members.

Q: How is the outreach to these at-risk plan members going?

Nabors: We estimate that in 2021, 30% of one-on-one meetings with plan advisers were with members who fell into one or more of the at-risk categories.

We closely monitor engagement metrics, such as the rates at which members open our emails and click through our messages, as well as the positive actions that members may take within a designated time frame after such engagements. This helps us refine our strategies for targeting specific member behaviors.

Q: So you’re seeing signs that this outreach strategy is working?

Nabors: We’ve seen substantial results in the two years since we implemented this outreach strategy. We reduced the number of older members whose portfolios had too much equity exposure from 22,073 in 2020 to 17,011 in 2021. Likewise, the number of members whose portfolios had insufficient inflation protection also decreased from 9,953 to 8,883 in the same year.

Lillard: Members’ access to licensed counselors with broad knowledge about pension-related investment types and to their lifetime income score provide them with a more holistic view of their retirement package and are proving to be effective retirement readiness tools.

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