Academic journal article Review of Business & Finance Studies

Retirement Planning: New Faculty Orientation

Academic journal article Review of Business & Finance Studies

Retirement Planning: New Faculty Orientation

Article excerpt

CASE DESCRIPTION

Most Colleges/Universities require all full-time employs to be a member of a Retirement System, whether the choice is "defined benefit" or "defined contribution". When the distinction is made clear, probably 85 to 90 percent of employees select the "defined contribution" approach over the more strict requirements of the "defined benefit" approach. The term used at Wendell University is "Optional Retirement Program" (ORP) that requires each employee to contribute 6.65 percent of the salary while Wendell University contributes 6.0 percent. This 12.65 percent of the employee's salary is sent to the employee's choice of a "Carrier" for investment.

At the request of the Dean of the College of Business of Wendell University, Jack Pettyjohn, an investment advisor of Lovell & Co., makes a presentation every year as part of the new faculty orientation. Jack has a license to sell securities along with a license to provide investment advice. He has a preference for investment advice rather than selling securities. Consequently he receives calls frequently to make presentations to Corporations sponsoring 401(k) plans to their employees. Wendell University's retirement plan is a 403(b), which is similar to the corporate 401 (k) plan. Jack enjoys making presentations to University Faculty more than to the attendees of the corporate 401 (k) plans.

Jack considers Wendell's Provost a friend, having had finance classes with the Provost when he was a faculty member in the College of Business. The Provost is also a contact man when other departments or Colleges at Wendell request similar presentations. At each presentation Jack believes that he was being challenged. He did not want to be considered to be a salesman with so many teachers looking forward to his presentation. He knew the audience was expecting tangible and useful data on retirement plans.

The case is appropriate for all academic units that have retirement plans sponsored by the State or private schools. In addition however, the case would be appropriate for all businesses or organizations that sponsor retirement programs for their employees. Time to prepare for the presentation would be no more than three hours and for another hour for discussion.

JEL: G-110

KEYWORDS: Retirement Plan; Mutual Fund: Expenses; and Performance.

CASE INFORMATION

The Investment Company Institute (ICI) publishes an Investment Company Fact Book annually that contains much current information pertaining to Mutual Funds. A mutual fund is an Investment Company that starts by selling shares to investors to gather assets which are used to invest in various types of securities, depending on the objectives of the fund. Morningstar follows and has data on 25,256 mutual funds that covers objectives about as broad as one's imagination.

Portfolio theory indicates that an investor should have about twenty or more different securities to satisfy the need for diversification, but most small investors have from four to ten different securities. An illustration to show that an investor can receive professional management and diversification by the purchase of one share of an index fund such as Vanguard 500 Index., which was priced at $98.93 in a recent Wall Street Journal. Vanguard 500 Index replicates the S&P 500 by holding all 500 stocks in the index and holds them in the same proportion in each sector/industry as held in the S&P 500 Index. By holding at least one share or more of Vanguard's 500 Index, one is assured of a return the same as the market, as represented by the S&P 500 Index.

The UIT is a Unit Investment Trust which has a varied size portfolio put together by a Trustee. For the most part the securities are tax exempt. Shares of the portfolio trust are sold to investors at net asset value (NAV) plus a minimal commission. The assumption is that the shares are "redeemable", but in all cases, the trust closes when the bonds mature. …

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