Too many Americans are financially ill-prepared for retirement. This year’s annual survey by the Employee Benefit Research Institute, found only 21% of respondents were “very confident” they will have enough money in retirement, and a large majority are behind where they should be with their savings. [i]
As PLANSPONSOR recently noted, 401(k) plans are under new scrutiny following Ted Benna’s comments, prompting new questions about options people have. Based on my professional experience as a university president and personal experience being semi-retired, I believe a variety of options and annuities are a crucial part of the retirement savings mix that should be offered to faculty and staff, employed by higher education institutions. Most likely, people employed by higher education institutions are better positioned for retirement in part due to the better-than-average savings options most schools have traditionally offered. What matters, as much as total savings, is that people have options that are right for them.
Choice is a Crucial Component in the Total Benefit Package for University Employees
Having served as President of the Thunderbird School of Management, President of Colorado State University, and Dean of Arizona State University’s W.P. Carey School of Business, I regard university retirement packages as fundamentally different from those in the private sector. They are usually better. Many schools offer matches to retirement contributions well above what most private-sector employers offer and a large number of employees often make the maximum allowable contribution, wisely so.[ii] The outstanding retirement options are rightly regarded by faculty and staff as an appealing aspect of university employment and an important component of their compensation package.[iii] Universities also offer lifetime income guarantees (annuities) at a much higher proportion than in the private sector.[iv] Providing this option responds to many employees’ preference for a guaranteed income option akin to pensions for public sector employees and what formerly was offered by some large corporations.
At the heart of the retirement offerings is a variety of choices. Higher-education retirement plans should provide the opportunity to diversify portfolios and select a mix of securities aligned with individual employee’s circumstances. Faculty and staff of differing ages rightly possess widely varying tolerances for risk in their retirement investments. Younger workers, for example, may very well select a higher proportion of equity options, as they are better able to ride out the ups and downs of the stock market. Older workers often perceive that they are better off playing it more safely with a higher mix of fixed income options and government bonds. The variable tolerance for risk and differing preferences of individuals are the reason they deserve 403(b) plans with options, including annuities as a part of the mix.NEXT: The importance of annuities
[ii] Plan Sponsor Council of America, 403(b) Plan Report, 2016; Plan Sponsor Council of America, 58th Annual Survey of Profit Sharing and 401(k) Plans, 2015 (According to Plan Sponsor Council of America, the average salary deferral rate for higher education 403(b) plan participants was 6.9 percent, while the average percentage of salary deferred for all active 401(k) participants was 6.3 percent. Additionally, the average maximum employer matching contribution to participants’ 403(b) plans was 7.5 percent within the higher education industry, while the average maximum employer matching contributions allowed by 401(k) plans is 3.9 percent.)
[iii] Paul Yakoboski “Findings from the Retirement Confidence Survey of College and University Faculty,” TIAA Institute, 2005; Paul Yakoboski, “Retirement Confidence on Campus: The 2011 Higher Education Retirement Confidence Survey,” TIAA Institute, 2011
[iv] U.S. Department of Labor, Employee Benefits Security Administration, Report, “What You Should Know About Your Retirement Plan,” 2013; Jonathan Barry Forman, “Removing the Legal Impediments to Offering Lifetime Annuities in U.S. Pension Plans,” Working Paper, Expected publication Winter 2017. (Among public colleges and universities with a primary defined contribution plan “almost all offer annuitization as a retirement payout option, though few require some degree of annuitization. As of 2010, only 18 percent of private industry workers had annuities available to them.)