It's Your Retirement Money
Decisions made in Madison affect your financial future
By Sandra R. Brodnicki
Written for News & Views and OnWEAC
It’s a complicated system that readies Wisconsin teachers and
other participants for what should perhaps be an uncomplicated time
— retirement. This intricate system, filled with policies and procedures,
contributors and calculations, provides the retirement benefits for
more than 94,000 retirees today.
 Janna Cochrane, a 4th-grade teacher
at Mount Horeb Intermediate School, and her husband, Mark, look
over their retirement system papers at their home. |
“We have one of the most complex retirement systems in the country,”
said Julie Reneau, communications director of the Department of Employe
Trust Funds (ETF), which administers WRS. That’s a sentiment echoed
by both participants and those who work within the system.
Wisconsin public school teachers make up a large chunk of the 243,912
active participants who, along with their employers, are now making
contributions to WRS. Roughly 32% of those actives — that’s
78,939 — are teachers participating in the nation’s 10th largest
public fund, with assets of more than $40 billion, according to industry
rankings.
How they relate
In total, 437,533 individuals — including current contributors,
retirees and others receiving benefits — participate in the WRS,
which is the largest of 10 benefit plans administered by ETF. A state
department, ETF is governed by the Employe Trust Funds Board, a 12-member
body that sets policy, appoints a department secretary and generally
oversees most of the benefit programs. Membership on this board is set
by state law.
As administrator, ETF ensures proper reporting of contributions, oversees
eligibility screenings and sends out monthly checks to retirees and
others who receive benefits. Working with its actuaries, ETF’s
role is to determine how much money is needed to fund the pensions and
benefits and report those needs to the State of Wisconsin Investment
Board, or SWIB.
“By law the assumed interest earnings are 8%,” Reneau said.
“ETF and SWIB work closely to ensure the funding needs of the system
are met.”
Although a separate agency from ETF, SWIB is responsible for investing
those contributions made by employers and employees to the WRS.
SWIB is a state agency, directed by an independent board of trustees
and staffed with professional money managers.
“Basically if you want to know about your benefits or how they’re
calculated, call ETF,” said Vicki Hearing, SWIB public information
officer. “If you want to know where your investments are, call
SWIB.”
SWIB creates investment earnings to at least meet the WRS needs. When
those earnings are added to contributions already received or anticipated,
contribution rates from employers and employees will not have to be
increased.
If SWIB exceeds the earnings assumption, the result may be post-retirement
benefit increases for retirees, increased interest credited to the accounts
of active employers, or reduced employer and employee contributions.
SWIB’s performance has been commendable, especially in the last
few years of a bull market.
SWIB Executive Director Patricia Lipton said she is pleased with the
performance of the two funds — the fixed and variable. At the end
of 1997, the funds were tabbed at $43 billion for the fixed and $6.1
billion for the variable, with total rates of return of 17.2% and 21.6%,
respectively. “I think we’ve had good solid returns,”
she said.
Obviously, there is not a dollar-to-dollar match from what SWIB earns
and what ETF pays out. That’s because some money is reinvested
and some is used to smooth the volatile effects of market gains and
losses over time.
Earlier this year, most of the 94,000 retirees in the WRS received
a 7.7% increase in their monthly retirement checks. During the last
10 years, the average compounded annual dividend in the fixed fund had
been 5.7%.
Fixed vs. variable
Each fund has its owned investment strategy. (See “Diversity is
key to SWIB strategy.”) Simply put, the fixed fund is a fully diversified,
balanced fund that includes a mixture of holdings, such as stocks, bonds
and real estate designed to ride out swings in the market. All WRS participants
have money invested in the fixed fund, which is typical for large public
pension funds.
The variable fund is primarily a stock fund resulting in a greater
degree of risk due to the volatility of the stock market. By law, the
variable fund was closed to new participants in 1980. However, there
is discussion to open the fund again to WRS participants, considering
how well that fund has been performing.
The funds’ performances relate to current and future retirees’
benefits, which are calculated two ways — the formula method and
the money purchase method. Upon retirement, a participant’s benefits
are calculated both ways by ETF, which automatically pays the higher
amount.
Changes on the horizon?
Changes to the system could be on the horizon, thanks to a study that’s
now under way by the Legislature’s Joint Survey Committee on Retirement
Systems. It is studying the impact on the WRS of an optional retirement
plan for newly hired University of Wisconsin faculty and academic staff.
The report is due January 1.
Scott Dennison, director of retirement research for the committee,
said the report will feature four options for the UW Board of Regents
to consider. Two of the options would give newly hired UW faculty and
staff the opportunity to use an alternative privatized program called
a money purchase retirement plan. This type of plan accumulates money
in an investment account that eventually is used to purchase a pension,
or an annuity. Money purchase retirement plans are one of the simplest
forms of “defined contribution” plans, which may feature a
number of investment choices. Many, such as 401(k)s, are set up to receive
contributions on a pretax basis.
The remaining two options to be considered by the Board of Regents
are WRS hybrids. These alternatives feature improved death benefit plans
and increases in the current 5% earning cap.
The regents must recommend some optional retirement plan by June 1,
1999, Dennison said.
The result is some new university staff and faculty might opt out of
WRS, taking their contributions with them.
“It’s an attempt to diminish the WRS that annuitants and
current employees should be very concerned about,” said Doug Lueck,
WEAC-Retired affiliate coordinator. The immediate effect, he said, would
be fewer people and fewer dollars contributing to the retirement system.
“That means we’re not going to be a $50 billion fund anymore,”
Hearing added. “One of the reasons we earn the earnings we do is
because of our size.”
Such a plan could feasibly expand to other employment categories at
some point, Lueck added. More than 40 states have started to change
their retirement systems to allow some employees alternative options.
However, most of those are limited to university faculty.
Lueck said WEAC-Retired co-sponsored an October 14 statewide conference
for a broad coalition of WRS annuitant organizations to discuss the
impact of the proposed UW Optional Retirement Plan.
A long-time participant in the system and Wisconsin teacher who is
nearing retirement said teachers need to keep an eye the situation.
“It’s our money,” she said. “We should have some
impact on what’s going on.”
Posted December 3, 1998