Snapshot of Teacher Retirement
Virginia Retirement System
Teacher Contribution Rate-DB Plan: 4%
Employer Contribution Rate-DB Plans (2018): 13.36%
Teacher Contribution Rate-DC Plan: 1%
Employer Contribution Rate-DC Plan: 1%
Vesting Period-DB Plan: 5 years
Participation in Social Security: Yes
How Does Teacher Retirement Work in Virginia?
In Virginia, teachers are a part of the Virginia Retirement System, which includes not only teachers but all state employees. The VRS was founded in 1942.
But unlike most states, new teachers in Virginia do not automatically participate in a defined benefit (DB) pension plan. Instead, they are by default enrolled the Virginia Hybrid Retirement Plan, which combines elements of a pension plan and a defined contribution (DC) plan. Although it only comprises part of the hybrid plan, the basic structure of Virginia's teacher defined benefit (DB) pension is similar to that of other states. Unlike other retirement funds, a teacher’s contributions and those made on their behalf by the state or school district do not determine the value of the pension at retirement. Although those contributions are invested in the market, and often managed by private equity and hedge funds, the pension wealth component of the overall hybrid plan is not derived from the returns on those investments. Instead, it is determined by a formula based on their years of experience and final salary.
Unless they elected to join the hybrid plan, teachers hired prior to 2014 are enrolled in one of two statewide pension plans: Plan 1 or Plan 2. Teachers hired before 2010 and who vested by the end of 2013 are in the Plan 1 pension fund, unless they elected to join the Hybrid plan after it was created. Teachers hired between 2010 and 2013 are in the Plan 2 pension fund unless they elected to join the Hybrid plan after it was created.
How Does Virginia's Hybrid Plan Work?
Teachers hired since 2014 and those who elected to join Virginia's Hybrid plan contribute at minimum 4 percent annually to the defined benefit portion of the fund. Their employers contributions to the fund is actuarially determined each year. When a teacher retires the total value of their DB portion of the plan is determined by formula based on years of experience and a teacher's final average salary. Greater detail on the pension formula structure is provided in the section below.
In addition to the DB part of the Hybrid plan, there also is a DC component. Each year teachers contribute a mandatory 1 percent to their DC account. Their employer matches that amount an also contributes 1 percent annually. The state does also offer a supplemental 457 Deferred Compensation Plan that teachers can voluntarily join and contribute up to an additional 4 percent, and their employer will match up to 2.5 percent. However, participating in this additional plan is not required.
Under the Hybrid plan, teachers vest for the DB portion after 5 years of service. This means that after completing 5 years, a teacher is eligible for both their own and their employers retirement contributions. The vesting rules for the DC portion are different. Teachers vest into the DC part of the plan gradually. They are 50 percent vested after 2 years, 75 percent vested after 3, and fully vested after 4 years. If a teachers leaves the classroom or moves out of Virginia after 2 years, they are eligible for all of their own contributions, can access only half of their employers DC contributions, and will not be able to take any of their employers DB contributions.
How Is the DB Portion of Virginia's Hybrid Plan Calculated?
Pension wealth is derived from a formula. The figure below illustrates how a teacher pension is calculated in Virginia. It is important to note, however, that the state assesses an educator’s final salary based on their highest 60 consecutive months of salary. For example, a teacher who works for 25 years with a final average salary of $70,000 would be eligible for an annual pension benefit worth 25 percent of their final salary. But keep in mind the DB plan is only a portion of a teacher's retirement benefit under the hybrid plan.
Calculating Teacher Pension Wealth in Virginia
|1% Multiplier||X||Avg. highest 60 consecutive months of salary||X||Years of service|
Who Qualifies for The Pension Portion of Virginia's Hybrid Plan?
Like most states, teachers need to serve a number of years before qualifying for a pension. For new hires participating in the hybrid fund, Virginia has a 5 year vesting period. While educators qualify for the pension portion after 5 years of service, the pension may not be worth all that much. Moreover, educators can’t begin to collect it until they hit the state’s retirement age. The state sets specific windows when teachers can retire with benefits based on age and years of experience. New teachers starting out in Virginia can retire with their full benefits when they reach their normal Social Security retirement age with at least 5 years of experience, or when their age and years of service combine to at least 90 with a minimum of 5 years of experience.
Additionally, Virginia allows early retirement from age 60 once a teacher has accrued at least 5 years of experience. However, teachers taking that option will have their benefits reduced.
How Much Does Virginia's Pension System Cost?
As they work, teachers and their employers must contribute into the plan. Those contribution rates are set by the state legislature and can change year-to-year. In 2018, teachers contributed 4 percent of their salary to the pension portion of the Hybrid plan, while the state contributed 13.36 percent across all of the Virginia's pension funds. However, not all of that investment goes toward benefits. While the full amount of a teacher's contribution is for benefits, the state contributes only 4.5 percent. The remaining 8.86 percent state contribution is to pay down the pension funds' debts.
As with most state pension funds, Virginia's hybrid teacher retirement system provides the greatest benefits to teachers who stay the longest, while leaving everyone else with inadequate benefits. With that in mind, teachers participating in Virginia's hybrid plan should think carefully about their career plans and how they interact with the state's retirement plan.
Glossary of Financial Terms
Vesting period: The number of years a teacher must teach before becoming eligible to receive a pension. Although the length of vesting periods vary by state, 5 years is typical. In every state, a teacher who leaves prior to vesting is eligible to withdraw his or her own contributions, sometimes with interest, but few states allow those employees to collect any portion of the employer contributions made on their behalf.
Employee contribution: The percent of a teacher’s salary that he or she pays annually to the pension fund.
Employer contribution: The percent of a teacher’s salary that the state, school district, or a combination of the two pays annually to the pension fund.
Normal cost: The annual cost of retirement benefits as a percentage of teacher salary. This excludes any debt cost.
Amortization cost: The annual cost of a pension fund’s contribution toward any unfunded liabilities. This can also be thought of as the debt cost of the pension fund.