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Retirement Plans for College Faculty at Public Institutions

By Lahey, Karen Eilers; Michelson, Stuart et al. | Financial Services Review, Winter 2008 | Go to article overview

Retirement Plans for College Faculty at Public Institutions


Lahey, Karen Eilers, Michelson, Stuart, Chieffe, Natalie, Bajtelsmit, Vickie, Financial Services Review


Abstract

This study provides a base line cross sectional analysis of defined benefit (DB) and defined contribution (DC) retirement plans based on the largest four-year public institutions of higher education in each of the 50 states. The focus is on types of plans that are being offered and an evaluation of their risk and return. Findings provide comparative analysis on the broader trends in DB and DC plans offered by other public and private plans. © 2008 Academy of Financial Services. All rights reserved.

1. Introduction

College professors who teach at public institutions of higher education have historically been enrolled in defined benefit (DB) plans as have those employed in me corporate world. Those who remain in the system long enough to vest and be entitled to a pension receive a monthly payment for life that is based on me number of years worked, average salary, and some percentage of that salary. A majority of states and most private institutions have adopted defined contribution (DC) plans in addition to, or in place of, DB plans. The DC plan makes the risk of accumulating retirement benefits the responsibility of the faculty member and the institution is responsible for providing a vehicle for that contribution.

Trade-offs between the two types of plans include the potential lack of sufficient funds for a comfortable retirement in a DC plan versus a guaranteed retirement annuity in a DB plan. The DC plan provides for portability of retirement investments if the employee changes jobs, for ownership of the funds, and for investment options while a DB plan remains with the institution who owns the funds and who is responsible for choosing appropriate investments and bearing the risk of poor selections.

In this study, we select the largest four-year public institutions of higher education in each of the fifty states to provide a broad overview of the breadth and scope of plan benefits and conditions. The focus is on the availability of DB and DC plans since the end of mandatory retirement and evaluation of the risk and options of these plans. Results allow a comparison to be made by individuals in both the public and private sectors to their plans provisions and the current issues surrounding DB and DC plans. Given the educational level of faculty and their employers, we assume that the findings will shed light on the broader trends and issues in retirement plans and retirement planning that are currently offered in the workplace.

A comparison of the key features of state retirement plans includes: (1) availability of DB, DC and combination plans, (2) Social Security participation, (3) availability of health plans in retirement, (4) employer and employee contribution percentages, (5) vesting requirements, (6) minimum age requirements for retirement, (7) collective bargaining, and (8) funded ratios. These factors may influence the risks and rewards that faculty face in terms of receiving income after retirement.

Section two provides a review of the literature on factors that have affected public retirement plans. Descriptions of the data sources and methodology employed is described in section three, followed by results of the analysis of public university retirement plans in section four. Our conclusions and summary are provided in section five.

2. Review of the literature

The mandatory retirement age (MRA) for college professors began to gradually increase from 65 to 70 years of age during the late 1970s and the 1980s. The Age Discrimination in Employment Act Amendments of 1986 (Public Law 99-592) specified that the MRA be eliminated for workers, but colleges and universities had a special exemption to delay the enforcement of the elimination of mandatory retirement at age 70 until January 1, 1994. The potential impact on higher education is a significant aging of the faculty and inability to hire new faculty because of a lack of retirements. Further, DB plans provided by institutions may have to provide larger yearly benefits but for a shorter period of time.

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