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How West Virginia Teachers Missed an Opportunity to Save More for Retirement

by Steve Hiraga

West Virginia teachers recently ended a 9-day strike in exchange for a 5% pay raise.  Average salary of those teachers was $45,622 in 2016, ranked 48th in the US.  Based on those rankings they would now pass Kansas to take over the 42nd spot.  Did they miss an opportunity to hold out for more?

The retirement plan abuses against US teachers have been well documented in articles like this one by the New York Times and by outspoken plan advisors like Anthony Isola (@ATeachMoment) of Ritholtz Wealth Management, so I won’t dive into them here.  However, based on public information posted on the West Virginia Teachers’ Defined Contribution Retirement System website, West Virginia teachers are in a situation no different than that of many educators around the country.

As I explored the retirement plan available to West Virginia teachers, I was pleasantly surprised to see that there is a mandatory employer contribution of 7.5% of salary.  There is also a mandatory employee contribution of 4.5%.  In other words, teachers’ retirement plan contributions will increase simply by passage of the 5% pay raise; that’s a good thing.

However, this is an insurance based plan and the abuses I alluded to above are clear and present in this plan.

Again, that isn’t the focus of this blog, as I believe it would have been nearly impossible for the teachers to lobby for wholesale changes to their retirement plan in addition to their pay raise while maintaining public support, keeping kids out of school, and supporting their families.

Where I think they could have provoked change was to the investment options available to them in their plan.  Currently, the average net expense ratio of the funds available for teachers to invest in is 0.56% with a median of 0.54%.  What that means is for a teacher with a retirement plan balance of $40,000 invested in funds with an average expense of 0.56%, they would pay $224.00 in investment cost; an amount that grows as the participant’s account balance grows.  Additionally, there is an annual administrative fee of $100.00.

I wanted to know what it would be worth to WV teachers to decrease their fund costs.  I believe that there are funds available on their retirement plan platform but currently not offered, that could at least cut their average fund expense in half.  So, I made the following assumptions and then did the math;

Scenario 1 – Current Situation; pre-5% raise

Teacher who is 40 years old retiring at 66.

Current balance of $40,000.

Salary of $45,622 (2016 average WV salary)

Employer contribution 7.5%

Employee contribution 4.5%

Average investment returns of 7%

Average inflation of 2%

Effective rate of growth of 4.90%

Average fund cost 0.56%

Annual admin expense $100

Balance at retirement $405,374

 

Scenario 2 – 5% raise and no change to fund expense

Teacher who is 40 years old retiring at 66.

Current balance of $40,000.

Salary of $47,903 (2016 average WV salary PLUS 5%)

Employer contribution 7.5%

Employee contribution 4.5%

Average investment returns of 7%

Average inflation of 2%

Effective rate of growth of 4.90%

Average fund cost 0.56%

Annual admin expense $100

Balance at retirement $419,593

 

Scenario 3 – Pre-5% raise and fund expenses cut by 50%

Teacher who is 40 years old retiring at 66.

Current balance of $40,000.

Salary of $45,622 (2016 average WV salary)

Employer contribution 7.5%

Employee contribution 4.5%

Average investment returns of 7%

Average inflation of 2%

Effective rate of growth of 4.90%

Average fund cost 0.28%

Annual admin expense $100

Balance at retirement $426,754

 

Scenario 4 –5% raise and fund expenses cut by 50%

Teacher who is 40 years old retiring at 66.

Current balance of $40,000.

Salary of $47,903 (2016 average WV salary PLUS 5%)

Employer contribution 7.5%

Employee contribution 4.5%

Average investment returns of 7%

Average inflation of 2%

Effective rate of growth of 4.90%

Average fund cost 0.28%

Annual admin expense $100

Balance at retirement $441,580

 

Please note, there are limitations to this math as I wanted to produce it quickly and did not account for the contributions being made on a monthly, or per pay-period, basis.  These calculations were done with all the contributions and expenses coming at the end of the year, but I do not believe the results to be significantly different, and the point I’m making remains intact; at times when teachers are able to force change, the costs that they pay throughout their entire career that are hidden in the shadows go without being addressed.

In all forms of retirement plans, fund expenses are rarely known or understood by the plan participants, making for an easy way to raise costs in a manner that plan providers know will not be scrutinized.  I am sure that the West Virginia Teachers’ Defined Contribution Retirement plan provider is celebrating today’s news, because not only were the teachers effectively striking on its behalf, but the provider is the party receiving the largest raise.

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