Michigan Senate Approves Bill to Change Default for New Public School Employees

The Michigan Senate has given its imprimatur to a bill that would amend the law that governs the default option for newly hired public school employees. 

In so doing, the chamber joins the House of Representatives, which passed it on Oct. 12. It was then referred to the Senate Committee on Education on Oct. 17; the committee reported it on Nov. 1 and the Senate passed the measure a week later in a 21-14 vote. 

Current Law

Current law provides that new teachers must choose to participate in either Tier 1—the Pension Plus 2 plan—or Tier 2, which generally is a defined contribution plan, within 75 days of hiring. Both tiers are part of the Michigan Public School Employees Retirement System (MPSERS). A teacher who does not make this election is defaulted into the Tier 2 plan. The law also provides that retirement elections are final. 

The Bill 

House Bill 5021, which Rep. Matt Koleszar (D-Wayne) introduced  on Sept. 20, 2023, would amend the Public School Employees Retirement Act to change the default retirement plan for newly qualified plan participants from Tier 2 to Tier 1. The bill would change the law so that:

• Only those who first became qualified participants in the state retirement plan from Feb. 1, 2018, through June 30, 2024, would have Tier 2 as their default election. 
• Beginning July 1, 2024, an individual would default to being a Tier 1 participant if he or she does not make an election, and also would be a qualified participant in Tier 2. That individual also would be eligible to accrue any service credit or qualify for any retirement allowance under Tier 1 under the terms established by the Public School Employees Retirement Act. 

Analysis 

According to a House analysis of the bill, supporters of shifting the default option from the DC plan to a pension plan argue that doing so offers teachers more flexibility later, since it is possible to start with a pension and transition to a 401(k), while it is not possible to do the opposite. 

Opponents of changing the default note that the pension plan takes longer to be fully vested, so defaulting new hires into Tier 1 would restrict their ability to keep employer contributions in their retirement plan if they leave.

A Senate analysis of House Bill 5021 cites reports that many new teachers make establishing a retirement account a lower priority than other matters; the House analysis backs those reports, observing that nearly 60% of new hires—58%—do not make an election. The Senate analysis further cites testimony offered before the Senate Committee on Education that teachers often regret allowing themselves to be covered by the Tier 2 plan by default and would rather be covered under Tier 1. 

Status

House Bill 5021 was referred to the Clerk of the House of Representatives for enrollment printing and presentation to Gov. Gretchen Whitmer (D) for her signature.