Retirement plans are a variety of government, employer, and individual financial programs that help provide a livable income when a person retires. The three principal sources of retirement income in the United States are the government-sponsored Social Security system, private employer-sponsored retirement plans, and individual savings plans. These three sources of retirement income have often been called the "tripod of economic security." Most experts agree that people need to receive income from all three sources to remain financially secure during retirement (Rosenbloom, 2002).
Two major forms of employer-sponsored retirement plans are defined benefit (DB) plans and defined contribution (DC) plans. The key elements of these plans are listed below:
|Plan Type||Defined Benefit (DB)||Defined Contribution (DC)|
Retirement pension is based on a specific formula (usually including years of service and average salary at retirement). The employer is responsible for contributing sufficient resources into a pension fund to pay the promised benefit.
Retirement pension is based on the amounts contributed by the employee and the employer to the employee's plan account and the interest earned.
|Key Differences in Risk Factor||
There is no direct relationship between the investment return and the employee's pension. If the return is poor, the employer is responsible for covering any shortfall in the fund. In other words, the employer takes the risk.
The employee's pension at retirement is directly related to the investment return on his/her account. If that return is poor, the pension is lower and vice versa. In other words, the employee takes the risk.
|Advantage for the Employee||
The employer typically funds the total cost of the retirement plan without any contributions from the employee.
Employees who remain with a single employer until retirement can accumulate benefits that represent a significant portion of final earnings.
The employer makes a "matching" contribution to the employee's account.
Employees have control over the investment of funds. Many defined contribution plans provide a series of options that allow employees to select investment funds with different levels or risk.
Upon termination of employment, a vested employee has the capability to fully transfer his/her account from one employer to another or roll it into some other retirement plan. In other words, the account is portable.
|Disadvantage for the Employee||
The employee has no control over the pension fund investments.
If the employee does not work long enough to vest (own) the program, he/she receives no benefit.
If the employee is hired at a relatively young age and, after vesting, leaves after only a few years of service, he/she will receive a relatively small benefit based on earnings many years before retirement.
Because employees bear the financial risk associated with long-term retirement investing, their investment choices must be carefully considered.
The return value of a DB plan depends greatly on whether the employee remains with the same employer until retirement.
The return value of a DC plan directly relates to the investment return on an employee's account, whether or not the vested employee stays with the same employer or moves around.
The BYU Retirement Advantage
A Combination of Plans
Many employers only offer one type of plan, but participating in only one plan type carries some risks. BYU provides the opportunity for employees to participate in a combination of plan types, a very necessary advantage when trying to meet retirement goals.
BYU offers the Master Retirement Plan — a university-funded defined benefit plan. Five years of eligible employment provides 100 percent vesting (i.e. ownership). At retirement, benefits are calculated based on the final average salary, benefit credit (years of eligible service(, and a multiplierThis plan is intended to be combined with Social Security, supplemental retirement programs, and personal savings to provide an overall retirement income.
BYU also offers Supplemental Retirement Plans — defined contribution plans that provide excellent opportunities to build a supplemental retirement income. Personnel may participate in one or all of the plans, depending on eligibility. A contribution of salary for a given pay period will qualify eligible personnel for a "matching" contribution of salary from the University to the Deseret Mutual Thrift Plan*. These plans are intended to be combined with Social Security, the Master Retirement Plan, and personal savings to provide an overall retirement income. Available plans include:
Deseret Mutual Thrift Plan. Personnel may contribute from 1% to 96%*(up to $49,000) of their salary to the plan on either a before-tax [401(k)], after-tax [401(a)] or Roth 401(k) basis. A variety of investment funds are available.
TIAA CREF Plan. Personnel may contribute from 1% to 96%* (up to $49,000) of their salary to TIAA/CREF 403(b) accounts on a before-tax basis. A variety of investment accounts is available. The University does not match contributions made to TIAA-CREF.
*Legal and plan restrictions apply to the plans in regards to participation, eligibility, contribution limits, and withdrawal. Total participant contributions may not exceed 96% (up to $49,000) of salary. All premiums for medical, life and auto insurance coverage must be paid before any contribution is made to the various savings plans.
Eligible personnel are enrolled in the Master Retirement Plan upon hire and are encouraged to participate in a Supplemental Retirement Plan to help meet their retirement needs.
Personnel can easily enroll by visiting the BYU Benefits Office located in D-240 ASB. Hours are 7:45 a.m. to 5:15 p.m., M-F (closed during Devotionals).
If you would like more information regarding BYU Retirement Plans, please contact Peg Schmidt, Assistant Director, BYU Benefits office at 2-4486, D244 ASB.
Rosenbloom, J.S., 2002, http://encarta.msn.com
University of Winnipeg, 2002, www.uwinnipeg.ca/web/faculty/admin/hr/dcvsdb.shtml
TIAA-CREF Research Dialogues, 1997, Faculty Pension Choices in a Public Institution: Defined Benefit and Defined Contribution Plans. March/Issue 5