UM System researches different retirement plan for new employees

Monday, July 26, 2010 | 7:00 p.m. CDT

COLUMBIA — The University of Missouri System is considering a plan that would require new faculty and staff to contribute a specific amount of money per paycheck into their retirement accounts.

Under a "defined contribution plan," new faculty and staff would pay a mandated amount per paycheck to an account for their retirement funds. This plan would mandate the amount of money each employee contributes to the account, not the amount of money each employee receives upon retirement, said Betsy Rodriguez, system vice president for human resources.

Leona Rubin, chairwoman of MU's Faculty Council, said that at this point, she hasn't heard how much each employee would be required to contribute to the retirement fund. The system is still collecting data, so no numbers have been finalized.

The average employee contribution for schools in the Big 10 and the Big 12 is 5 percent of each paycheck, Rodriguez said.

The current retirement plan for all employees is called a "defined benefit plan." Under this plan, the system guarantees each employee a certain amount of money upon retirement. Employers have to contribute varying amounts into each employee's funds because of changes in the market, among other things.

Rodriguez said that in the current plan, the risk is on the employer because the system is guaranteeing a set amount upon retirement.

Although Rubin said she doesn't know whether the new plan is the right move for the system, she said the defined benefit plan isn't a viable option for the system anymore.

"I think the defined benefit plan is a dinosaur," Rubin said.

The new plan would switch the investment risk from the university to the employee. In a defined contribution plan, the employer is just mandating a contribution from each employee but not guaranteeing an end result.

Rubin said few large companies or universities have defined benefit plans anymore.

"It's much too hard for the institution to keep it fully funded and to keep it viable with fluctuating economic conditions," Rubin said.

There would be some initial costs under the new plan. In a defined benefit plan, both the employer and employees invest in the retirement plan. Employees have to work for the system for at least five years before they are considered vested and able to keep their share of the money they invest in the retirement account. When employees leave before five years, they forfeit to the system the employer's share of the money that has already been invested. This part of the money has traditionally been used to fund remaining employees.

In a defined contribution plan, employees have immediate vesting and would be able to keep the money they invest regardless of when they leave.

Rubin said the immediate vesting aspect is the biggest concern she has heard from faculty. Most employees who become vested in the retirement program want to stay in the system, she said. Now that they can take their retirement fund with them, there is less of an incentive to stay.

Peter Bowers, contract manager for the University of Colorado-Boulder, said the university's defined contribution program has helped retention rates among faculty. He said the fact that employees are able to control their retirement fund's investment is attractive to them, which is an incentive to stay.

The University of Colorado-Boulder has used a defined contribution plan since 1924. It requires employees to contribute 5 percent to their retirement funds.

Switching plans means the system would lose out on the forfeiture money, which would raise the system's cost for a period of time. However, this increased cost is expected to diminish after about 10 years, possibly a little longer, Rodriguez said.

When researching the new retirement plan, the system considered what other universities were doing. Comparable universities in the Big 10 and the Big 12 have defined contribution plans for faculty, Rodriguez said.

"And that's actually true across the country, not just for our peers," Rodriguez said.

The University of Nebraska-Lincoln has had a defined contribution plan since 1969. Gregory Clayton, director of risk management and insured benefits, said it was his understanding that the university adopted the plan after worrying about not getting enough state funding.

Both faculty and staff contribute to the retirement fund at the University of Nebraska-Lincoln.

The decision to switch to a defined contribution plan was a positive one for the university.

"It seems to have worked out well," Clayton said.

The proposed plan for new employees would not affect retirement plans for current employees, Rodriguez said. According to a previous Missourian article, current UM System employees are required to pay a percentage of their salaries to the UM retirement fund each month.

Rodriguez said that once the school year starts, she plans to schedule meetings with employees to get feedback on the proposed plan. She said she hasn't found a way to tap into potential employees' feedback yet but might talk to new employees to get their thoughts.

At the UM System Board of Curators meeting on Friday, Rodriguez told the curators she hopes to have a proposal to them by December.

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