Major Changes in Store for Virginia Teachers’ Retirement

As a result of changes made this legislative session to the state's pension system, Virginia's teachers are about to see major changes in the way their retirement accounts are handled. These changes will likely have a major effect on estate planning and how the teacher's retirement assets are divided in a divorce. The changes will take effect in 2014.

The new legislation creates a "hybrid" retirement plan that is part defined-benefit, part defined-contribution. Participation in the new plan will be mandatory for all employees starting after July 1, 2014, but employees starting before then will be able to choose whether to participate in the new plan or stick with the old one.

Defined Contributions vs. Defined Benefits

Currently, Virginia teachers participate in a defined-benefit pension plan. Essentially, teachers receive a set monthly benefit each month after retirement. In most defined-benefit plans, the monthly payment is a percentage of the former employee's average salary.

Defined-benefit plans offer predictable income - but put a lot of pressure on employers. The benefit payment isn't directly tied to market conditions or the health of the pension fund, which means that funds can become overwhelmed when there are a lot of retirees but not enough income to go around. In those cases, the employer has to pay into the pension fund to supply the needed cash.

Defined-contribution plans operate in the opposite way. Instead of participating in a group pension account, workers deposit a percentage of their monthly income into a private retirement account. Usually, this contribution is matched, at least in part, by the employer. At retirement, the worker draws a monthly benefit that is based on how well the account has performed over time.

Hybrid plans - like the one recently created for Virginia's teachers - offer a mix of both. Under that plan, teachers would be required to contribute between 1 and 5 percent of their income into a defined-contribution plan, with an employer match of up to 3.5 percent. They will also participate in a defined benefit plan that will use a 1.0 multiplier.

The new hybrid retirement plan will affect the division of teacher retirement plans in divorce, by making the asset division much more complicated. If you are a teacher and have questions or are considering a divorce, it is important to contact an experienced lawyer who can advise you of how the changes will affect your individual situation.