The state should ensure that pension systems are portable, flexible and fair to all teachers.
Virginia no longer offers a defined benefit pension plan to its teachers as their mandatory pension plan. The state now offers a hybrid plan for members hired on or after January 1, 2014. A hybrid plan has elements both of defined benefit and defined contribution plans. Although Virginia's plan is a hybrid, the defined benefit part is not fully portable, does not vest until year five, and does not provide any employer contribution for teachers who choose to withdraw their account balances when leaving the system. It also limits flexibility by restricting the ability to purchase years of service. The state, however, is commended for offering a fully portable supplemental savings plan, which also includes an employer match.
Both plan members and employers contribute to both parts of the retirement plan. Members contribute four percent of their earnings to the defined benefit component of the hybrid plan. In addition, members and employers each contribute 1 percent for the defined contribution component. Members may elect to contribute an additional 4 percent to a 457 Deferred Compensation Plan and commendably employers match up to 2.5 percent. Therefore, the total possible member contributions equal 9 percent while the total possible employer contribution to the two defined contribution accounts add up to 3.5 percent. Members vest in 100 percent of the employer contributions to their defined contribution accounts after four years.
Teachers in Virginia also participate in Social Security, so they must contribute to the state's defined benefit component of the hybrid plan in addition to Social Security. Although retirement savings in addition to Social Security are good and necessary for most individuals, the state's policy results in mandated contributions to two inflexible plans, rather than permitting teachers options for their state-provided savings plans.
Vesting in a defined benefit plan guarantees a teacher's eligibility to receive lifetime monthly benefit payments at retirement age. Non-vested teachers do not have a right to later retirement benefits; they may only withdraw the portion of their funds allowed by the plan. Virginia's vesting at five years of service limits the options of many teachers who leave the system prior to this point. According to a recent report, only 50 percent of employees in Virginia's teacher-covered pension plan vest, meaning that 50 percent of teachers do not become eligible for a pension and, therefore, can only collect their refundable contributions.
Teachers in Virginia with less than five years of service who choose to withdraw their employee accounts from the defined benefit component upon leaving only receive their own contributions plus interest, but not any employee contributions paid for by the employer. Certain school districts in Virginia pay all or a portion of teachers' mandatory contribution as an employment benefit; these are referred to as picked-up contributions. Teachers with at least five years of service receive their entire employee account, which consists of their own contributions and any contributions picked-up by employers plus interest. This means that those who withdraw their funds accrue no benefits beyond what they might have earned had they simply put their contributions in basic savings accounts.
Teachers with less than five years of experience who were employed by a district in which the employer picked-up the mandatory employee contribution may be leaving the system with no savings beyond Social Security. Furthermore, teachers who remain in the field of education but enter another pension plan (such as in another state) will find it difficult to purchase the time equivalent to their prior employment in the new system because they are not entitled to any employer contribution.
Teachers immediately vest in their own contributions made to the defined contribution portion of the pension plan. They also vest in 50 percent of the employee contributions after 2 years of service, 75 percent after 3 years of service, and 100 percent of employer contribution after 4 years of service. Employer contributions made to the Hybrid 457 Deferred Compensation Plan are also subject to this vesting schedule.
Virginia limits teachers' flexibility to purchase years of service. The ability to purchase time is important because defined benefit plans' retirement eligibility and benefit payments are often tied to the number of years a teacher has worked. Virginia's plan allows teachers to purchase time for previous teaching experience, up to four years. While better than not allowing any purchase at all, this provision is less than most states' and disadvantages teachers who move to Virginia with more teaching experience.
The state's plan also allows teachers to purchase up to one year of service per approved leave of absence, up to four years. This is a disadvantage to teachers who need to take more than four years of total leave over the course of their career, such as for paternity or maternity care or for other personal reasons.
Virginia Retirement System, Hybrid Retirement Plan Handbook for Members, October 2015. Aldeman, C. and Rotherham, A. (2014). Friends without Benefits: How States Systematically Shortchange Teachers’ Retirement and Threaten Their Retirement Security, Bellwether Education Partners.
Offer teachers a pension plan that is fully portable, flexible and fair.
While Virginia is commended for offering a hybrid plan, which provides greater portability than a standalone defined benefit plan, the state should also offer teachers for their mandatory pension plan the option of either a defined contribution plan or a fully portable defined benefit plan, such as a cash balance plan. A well-structured defined benefit plan could be a suitable option among multiple plans. As the sole option, however, the hybrid plan still disadvantages mobile teachers and those who enter the profession later in life. Because teachers in Virginia participate in Social Security, they are required to contribute to two defined benefit-style plans.
Increase the portability of its defined benefit plan.
If Virginia maintains its defined benefit plan, it should allow all teachers that leave the system to withdraw interest and employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience, at least one year per approved leave of absence, and decrease the vesting requirement to year three. A lack of portability is a disincentive to an increasingly mobile teaching force.
Virginia did not respond to repeated requests to review this analysis.