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Protect Your Retirement Benefits

Why worry about retirement, now?

Whether you are approaching retirement, in the middle of your career, or just starting out, there are forces at work that can negatively affect your future.

Two stock market crashes in just the past decade have caused pension fund investments to nosedive, requiring the pension sponsors--whether private companies or governments--to struggle to return those funds to well-funded status.

Congress is requiring private firms to fully fund their pension plans by 2016. And, while not required to meet the same standard, public agencies are looking for ways to improve their underfunded pension plans.

Those struggles are leading some companies to abandon their defined-benefit pension plans, which promise employees a certain level of pension. Some are replacing them with defined-contribution plans, which base an individual's pension on what that person has in a special savings account. (Continue story below)

To Learn More

• Check out our FAQs on your retirement security and what changes may be in store.
• Read Time magazine's feature story on "Why It's Time to Retire the 401(k)."
• Review our talking points on why traditional Defined-Benefit (DB) pension plans outperform Defined-Contribution (DC) plans such as the 401(k).
• The National Institute for Retirement Security did the math, and a 401(k)-style retirement plan actually cost employers more than a traditional pension plan to provide comparable retirement benefits.
• Find out how VEA has supported a strong retirement system throughout its history.
• View video of VEA's briefing on the threats to VRS and what you can do.

Governments, too, are struggling to return their pension funds to a healthy level, and some are considering the same changes that private companies are making.

What's the big deal with all of this? Well, from the worker's perspective, the shift from a guaranteed pension to one based upon the fluctuations of the stock market will result in substantial reductions in pension benefits and a diminished quality of life in retirement.

These changes are closer to home than Virginians might think.

In the fall of 2008, the Joint Legislative Audit and Review Commission (JLARC), a body that studies financial matters for the Virginia state government, presented a report on state employee compensation, including retirement benefits. The General Assembly directed that the study be done. JLARC provided a variety of options for saving the state and local governments money.

Just as Social Security is considered the untouchable "third rail" in national politics, serious changes to the Virginia Retirement System were considered a too-hot-to handle potato last spring as the state approached a general election. Observers on Capitol Hill in Richmond now, however, expect to see efforts to change the retirement system for state and local employees--including teachers and other full-time school employees--in legislation and on committee agendas as the General Assembly begins in January 2010.

What is being considered?

The legislative study body, JLARC, proposed a variety of changes that could save the state funds, while costing employees benefits. The study refers to the cost savings for the government as "cost avoidance," while it makes estimates regarding the cost to employees. The most drastic of the changes offered would cost a future retiree with 30 years of service nearly one-half of the benefits the current system provides. (Click here to read more about all 7 options.)

JLARC grouped the options into two categories-Minimal Impact and More Aggressive.

The "minimal impact" changes, as applied to school employees, would save the state and school divisions approximately $250 million a year. The employer cost savings of the three "more aggressive" options would save would range from approximately 2% to 5% of payroll. But the more aggressive the cost-savings, the more employees would bear the responsibility of a reduced pension check.

Option                   Employer Saving                   Employee Cost
R5                               1.94% of payroll                          15% of benefit
This option would replace the current defined-benefit plan with a combination plan (part defined-benefit, part defined-contribution)

R6                               3.33% of payroll                          43% of benefit
This option would replace current defined-benefit plan with a cash-balance plan (defined contribution, with a minimum guaranteed return)

R7                               4.94% of payroll                           48% of benefit
This option would replace current defined-benefit plan with defined-contribution plan

Take a careful look at these numbers! In the most aggressive option (R7), changes would provide a 5% savings to the employer but result in a 48% cost to the employee. That means an educator who retires with 30 years of service credit under the R7 option would receive a lifetime benefit totaling only 52% of the benefit of someone who retired with 30 years credit under the current system.

Better Bang for the Buck

Proposals to change from a traditional (defined-benefit) pension to a defined-contribution plan often are accompanied by claims that DC plans will save money for employers (or taxpayers). Don't believe them.

A study released last year by the National Institute for Retirement Security (NIRS) shows that--if you are committed to providing a comparable benefit to that guaranteed by a traditional pension--DC plans end up costing nearly twice as much.

Why? Because there are economic efficiencies embedded in traditional pension plans that are absent in the individual investment plans.

The bottom line in this study: "DB (defined-benefit/traditional) plans are the most fiscally efficient means of providing a modest but stable retirement income that cannot be outlived."

For a summary of results of the NIRS study, click here. For the full report, go here.