RETIREMENT PLANNING the Easy Way

Article excerpt

RETIREMENT PLANNING The Easy Way.

Retirement. A time to retreat from the troubles of the world to a life of rest and relaxation. Right? Well, not necessarily.

While today's retirees are living longer, more active lives than their predecessors, many are experiencing financial difficulty. Findings of a December 1995 study, conducted by the Employee Benefit Research Institute, show that although most working adults believe their lifestyles will improve with retirement, retirees are finding that their standard of living has actually declined.

All of this -- plus uncertainty over whether Social Security will be able to make good its promises -- have meant that financial experts urge everyone to begin planning their retirement almost as soon as they begin working, with the centerpiece of that planning being pension accounts.

For most college and university employees -- faculty, administrators and support staff -- the most common choice they face regarding employer-sponsored pension plans is whether to choose a defined benefit or a defined contribution plan.

The choice they make depends on such disparate factors as whether they plan on staying at their institution throughout their careers and how much they are willing to see their pensions fluctuate with the stock market.

While the majority of private colleges and universities offer defined contribution plans, most state institutions (and public institutions in the District of Columbia) offer defined benefit plans. Many state schools also invite employees to participate in Optional Retirement Plans (ORP) on a voluntary basis. Though these programs feature no employer contribution, they are an opportunity to engage in additional tax-exempt investment programs. Presently, Hawaii, South Dakota, Wisconsin, Missouri and Ohio are the only states where ORPs are not available to state university employees.

Defined Benefit Plans

With defined benefit plans, the employer promises to pay the employee a fixed amount of money, in monthly increments, once the worker retires. Typically, the monthly benefit check is calculated using a formula that considers the employee's annual salary, years of service, and retirement age.

Defined benefit plans generally require no employee contribution, though some institutions permit workers to augment the employer's contribution. In most situations, the worker's only obligation is to complete and return an enrollment card. The employer then invests the pension fund in stocks, bonds and mutual funds which they expect to grow over the years. Regardless of whether employees contribute to the defined benefit fund or not, the employer retains full control over how the funds are invested. If these investments go bad, it is the employer's responsibility to pay employees what they were promised. If for some reason the employer is unable to pay, the employee is paid by the Pension Benefit Guaranty Corporation, a federally funded insurance program.

Participants in defined benefit plans are usually eligible to receive benefits only after completing a specified vesting period (five years of service, for example), the term of which varies from employer to employer. Defined benefit plans provide a meaningful retirement benefit for long-term employees, according to Kyle Brown, a consultant with the Wyatt Consultants, a national firm that advises employers in the design of employee benefit plans. "When it comes to providing sufficient, sustainable retirement income, nothing does that like a defined benefit plan," he says.

For the short-term employee, however, defined benefit plans are less attractive. For instance, a professor with four different employers could conceivably participate in four separate pension plans and, upon retirement, would receive four separate pension checks. However, if she failed to meet the vesting requirements at each of her jobs, she might receive nothing.

Perhaps recognizing the differing trends among higher-education employees, some institutions, like Georgetown University, require administrative staff participate in a separate defined benefit plan, but offer a defined contribution plan for faculty members. …