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Understanding Your University Retirement Benefits

If you’ve ever enrolled in a university retirement system, you may have been overwhelmed by the choices and restrictions associated with these plans.  In many cases, employees must make their elections within a month of their hiring and while these decisions can dramatically affect your long term financial plan, most do not take the time to fully understand the benefits made available to them. 

First and foremost, all plans differ between institutions.  Plan options, contribution rates and limits, vesting schedules, and investment choices are among the factors that vary widely between schools.  It is important to fully understand the options made available to you prior to making any decisions regarding your elections.  Remember that the Human Resources department is always available to answer any questions you may have. 

Plan Options:  There are two primary categories of retirement plans: pensions and optional retirement plans.  For an in-depth review of these options, please visit our Pension vs. ORP article.  Voluntary options may also include a 403(b) plan (also known as a Supplemental Retirement Annuity or SRA) and public institutions may also have a 457 plan, also known as a deferred compensation plan.  Each of these plans is administered by an investment firm such as TIAA CREF or VALIC, to name two, and you will want to understand the differences between the providers prior to making your elections. 

Contributions:  The contributions to your retirement accounts can be divided between mandatory and voluntary contributions.  The IRS limits the amount of voluntary contributions, but any contributions made by the employee as a condition of employment are excluded from these limits.  Mandatory contributions can be made into either 401(a) or 403(b) accounts, depending on how the plan is set up.  Voluntary contributions are typically made into 403(b) plans with a limit in 2011 of $16,500/year or $22,000 if over age fifty.  Since 457 plans are not technically retirement contributions but instead deferred compensation, it has an additional limit of $16,500 or $22,000 if over age fifty.   

Vesting Schedules:  Vesting schedules pertain to how long you must be employed in order to receive employer contributions to your retirement plan.  Pension plans typically have more restrictive vesting schedules than optional retirement plans with many having schedules of ten years.  Vesting schedules can be “graded” or “cliff” schedules.  In a graded scale, an employee may receive 20% per year for five years while cliff schedules go from 0% to 100% on a specific date.  It is important to coordinate your expected tenure with the vesting schedules made available to you to ensure you do not leave any money on the table. 

Investment Choices:  Investment choices vary widely among plan providers.  Since you do not have control over how your money is invested within a pension plan, this is only a concern for optional and supplemental plans.  You will want to check the choices made available to you prior to making your decision and you can check the performance of the fund on independent websites such as Morningstar.  The investment choices are often what differentiate good providers from bad ones.  High fees and habitual underperformance can derail your financial plan.