VRS Hybrid Plan Drawing Even Fewer Contributions

Virginia Retirement System overall investment returns, all funds. Source: JLARC

The percentage of state employees making voluntary contributions to their own retirement pot, contributions which are matched with free money, has continued its rapid decline over the past year.  As of March 2019, fewer than half of state employees who should be investing in their own retirement are doing so, according to a Virginia Retirement System update Monday.

A year earlier, according to the comparable report given the Joint Legislative Audit and Review Commission and reported on Bacon’s Rebellion, 58 percent were contributing something and drawing in matching funds.  A year before that it was 79 percent.  Just how much money the 52 percent adding nothing this past year failed to invest, and how many matching dollars were therefore not captured, is not in the report. 

The full VRS presentation to JLARC is here and here is the JLARC staff’s own summary, both of them presented to the legislators Monday.  In general, the pension system is reporting another good year, with a total return on all investments of 4.7 percent against its industry benchmarks of 3.7 percent.  VRS underperformed benchmarks on its stock investments, however, both for the past year and the past three years.  It uses March 31 as the end of its reporting periods.

Fewer than half of hybrid plan members are making the voluntary contributions which trigger a matching contribution from the state. Source: JLARC. Click for larger view.

The actuarial measure comparing its assets to the expected future demand for benefits continues to slightly improve, with the local retiree plan a hair under 90 percent “funded,” the state employee plan at 77 percent and the teacher plan at 75 percent.  As reported in Tuesday’s Richmond Times-Dispatch, VRS may lower its assumed future returns from 7 to 6.5 percent, which would increase the state’s required employer contribution an additional $442 million, with additional funds demanded from localities.

It is those daunting future costs that caused the state to join the general stampede away from defined benefits and to defined contributions. The hybrid retirement plan depends on voluntary contributions and matching funds to achieve full benefits and is standard for VRS-covered employees hired since 2014. About 103,000 active employees participate.  That is up from 85,000 a year ago.  The total VRS customer base of active employees, retirees and beneficiaries is now 722,000.

The JLARC summary reports: “Employee turnover has contributed to the decline in the proportion of members making voluntary contributions. Over 59,000 new hybrid plan members have been added to the plan since the automatic escalation in 2017, and new employees tend not to initiate a voluntary contribution when they start employment.”  Automatic escalation refers to an increase in the non-voluntary contribution part of the deal, which happens again in January with an increase to 4.0 percent.

Of those 48 percent who do add voluntary contributions, almost half do the minimum, one-half of one percent of their compensation.  A very small group among the total 103,000 are making the maximum 4 percent voluntary contribution to draw the maximum state match.

Since March 31, all the major stock indexes have recently reached new all-time highs, of course.  Investors sitting on the sidelines since 2016 have missed something.  Yet an amazing number of people simply do not believe claims like the following, which is found in a footnote in the JLARC staff notes: “Hybrid plan members who make the maximum 4 percent in voluntary contributions would potentially receive retirement benefits greater than (defined benefit) Plan 1 or Plan 2 members.” 

They never view the matching money as a tax-deferred raise, which it is, but a raise they cannot collect immediately.  That is their loss and the Virginia taxpayers’ short-term gain.  With years of educational efforts tried and ignored, JLARC indicates the only way to improve the situation is to make higher contributions mandatory.  Switching back to a full defined benefit plan is not listed among the options.

The hybrid plan is only one of the four defined contribution plans managed by VRS on behalf of current or future retirees.  Participants in the older defined benefit plans are allowed to supplement those with voluntary investments, sometimes drawing small state or local matching funds.  That fund contains $3.2 billion.  A similar defined contribution fund for university employees exceeds $1 billion.  The fourth such plan, limited mainly to political appointees who might not last the five years until vesting, is tiny.

For those state university employees making defined contributions within VRS (several of the schools run their own plans), the agency has aggressively weeded out funds it considered poor performers or weakened by excessive fees.  The Fidelity funds which were available have been entirely “deselected” (a nice word for dumped) as of the end of this year and the fund choices available through TIAA have been changed.

In contrast, VRS claims the investment choices it offers almost always meet or exceed their industry benchmarks.

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14 responses to “VRS Hybrid Plan Drawing Even Fewer Contributions

  1. It’s a sad commentary when such a small percentage of employees sign up for the full employer match in their retirement plans. It shows a low willingness to defer gratification and a lack of future orientation, traits that are necessary for any successful society.

  2. That’s one point of view. With working children of my own, dealing with the high cost of day care and other aspects of parenthood, I understand the feeling among some that they cannot spare the additional 2-3-4 percent off the top, even though the tax benefit softens that blow and the match really pays off long run. We didn’t really buckle down to full saving for retirement until after the last tuition check was sent, which is going to be far harder for these families where the first kid came in the mid 30s, not the mid 20s.

  3. As a new state retiree (defined benefit),I have a couple of comments. One, I agree wit Steve about the difficulty for some to save for retirement. I am concerned about will happen to many of these people schemes they reach retirement age. Many state employees are that sophisticated or knowledgeable about managing finances. In addition, many are that highly paid. For example, the averages correctional officer makes about $35,000 year and many have second jobs . Saving for retirement is not something they think they can do. It would be best for the state to take the full amount up front, invest it, and provide a decent retirement, as the old plan did (the one I have).
    Second, the investment return realized was pretty lousy. The annual return for the most recent period was 4.7 percent; the return on the equity portion of the portfolio was 3.7 percent. For the same period, The S&P 500 index rose by 9.4 percent. VRS could have put allot equity funds in the index fund Ana more than doubled its return. Nevertheless, I am sure that all its highly paid investment staff got nice bonuses for exceeding the “benchmark”, which seems awfully low.

  4. I am considering putting it up there with 529 College Plan in my own financial giving plans, something parents/grandparents can contribute to if your grown children are not doing it for themselves.

    • It had a report on the JLARC agenda yesterday, too, but I haven’t really dug into it yet. I did notice is works with a 5.75 percent target for returns, well below VRS’s 7.0.

      • I have heard complaints about 529–large balances but have closed pre-paid program. Also large admin costs. I don’T know enough about the program to assess the accuracy of those claims.

  5. So why the substandard investment rate? Does that suppress participation and/or encourage some to invest outside of VRS?

    Also – would be interesting to see the income demographics verses participation rate to confirm the idea that lower income just do not have enough to spare to invest.

    Finally, imagine if Social Security were “voluntary” – how many folks would “need” that money more than “investing” it and would retire with even less and expect the govt to “help” them.

    We all do this to a certain extent because hardly any of us actually save enough to pay for our health care when we get older – we depend on that big, bad, incompetent govt to provided us with health care for the paltry sum of $134 a month (for those with average retirement incomes). Imagine how many seniors would be just simply destitute if they had to pay for health care what younger folks have to, or for that matter how many seniors would die years earlier if they could not afford health care!

    So is this a “problem” that government should address or leave it to the free market?

  6. If Social Security and Medicare taxes were voluntary, the same would happen. Aesop wrote about the grasshopper and the ant long, long ago….BUT for the most part both of those social insurance programs are funded by taxes on wages, split with the employee and employer. That’s the old model of the state’s retirement plan back in the day, employees paid 5 percent out of their checks and then the state/local employer put in more. That should probably be the model and then the question is defined benefit or you get what the pot is worth at retirement? It is the guaranteed benefit and COLA decades out that creates the uncertainty and risk. (Ka-ching for us, though, as my wife’s VRS goes up again next month with yet another COLA…)

    Yep, we’re discovering that Medicare is hardly free, despite our own decades of taxes into that system. I wonder if anybody dares to tell all those excited voters expecting Medicare for All that it won’t be free, and if properly priced it may be more expensive than now….

    • Medicare is, like any other health insurance, a balance between premiums paid and expenses paid and if Medicare functioned as originally intended – i.e. you are responsible for 20%, then the decision to utilize health care would involve folks own money also.

      Non-Medicare employer-provided has the very same problems and has to balance between premiums paid and expenses incurred. Ditto with ObamaCare.

      And yes, agree, if Medicare expands to “all” (i.e. those who cannot or do not get Employer-provided, it WILL cost more than original Medicare plus Medicare Advantage costs right now.

      But it won’t likely be more than what folks pay EP already.

      Our problem, compared to ALL the other developed countries is that those that do have insurance are, in effect, paying for those who do not whereas in Europe/Asia – everyone pays a tax for it – like we do for Social Security.

  7. Many state and local governments have been using unreasonably high return estimates in their calculation of pension costs and liabilities. I suspect that some are doing this purposefully to keep public sector unions happy, while misleading the voters about the sustainability of public sector pension plans.

    Question: Is it fair to force taxpayers to pay more to keep defined benefit plans available to new hires given that most people in the private sector do not have defined benefit retirement plans? Personally, I think hybrid plans may be the way to go but local governments must also realize that taxpayers who pay higher taxes can often vote with their feet. Fairfax County, for example, is hollowing out its middle class, especially retired members. Lots of high-income people but lots and lots of poor people. And as raised in another post, more and more people are being replaced by robots, etc.

    • Most comparability studies show that public employees get paid less than their counterparts in the private sector, at least in Virginia. One of the major trade offs had been the defined benefit retirement system. So the taxpayers were paying less on the front end, while helping to fund a defined benefit program. By switching to a hybrid system, the state may be worse off in the long run in terms of the quality of its employees.

  8. There is a mindset that government employees are substandard “employees” who deserve to get paid less and not get super-good pensions.

    I’m not one of them but I’ve heard enough from others to know this is not an uncommon view.

    It’s a conundrum because more than a few folks will take a govt job for it’s job security – and that harms the govt when they cannot easily get rid of under-performers and reward high performers. Everyone ends up on the same plane which is more or less – seniority.

    It’s hurt our school systems because really good teachers do not get rewarded financially and not-so-good teachers can hang on even when they are not the best for the students, especially so in urban districts with lots of at-risk kids. Few good teachers will take those jobs – no increased pay and high probability of being scapegoated if crap blows up above them.

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