Things to Consider When Choosing A Retirement Plan
Carlene Hamilton
OSURA Communications
In all of the excitement and challenge of a new job, it’s easy to overlook the importance of retirement benefits. We who are now retired were focused on our first paycheck, too. Now living with the decisions we made, we offer some perspective on what you should consider.
Take advantage of the information provided by the Office of Human Resources (OHR) at Ohio State: retirement planning forums, web site, and individual counseling. Coworkers are another source of advice. Learn all you can about retirement benefits, including costs, risks, and health coverage.
Which Program Is Best for You?
Faculty and staff at Ohio State are enrolled in either the Ohio Public Employees Retirement System (OPERS) or the State Teachers Retirement System of Ohio (STRS) program unless they select an Alternative Retirement Plan (ARP). Both you and the university contribute a percent of your salary to the appropriate plan; the employee’s portion is taken from your paycheck before taxes, thus reducing the gross amount that can be taxed. Your contributions are immediately vested, but there are variations in the vesting of university contributions or survivor benefits depending on whether you choose a defined benefit or defined contribution plan (or you may select a combined plan which has features of both).
Here’s the difference between defined benefit and defined contribution plans:
- Defined Benefit: The contributions made by you and the university on your behalf are invested by the retirement system and grow by adding years of service credit (earned or purchased) and increases to your salary. You assume no investment risk and pay no management fees. The benefit amount is based on a formula using your age, years of service credit, and final average salary (three highest years). You allow OPERS/STRS to manage all assets to fund your benefits. This option is only available through OPERS/STRS (in OPERS, it’s the Traditional Pension Plan) and is not available through ARP.
- Defined Contribution: You determine where your contributions will be invested from a variety of options offered by the ARP vendor or OPERS/STRS. Your account grows with contributions made by you and the university as well as any investment returns you may have on your account contributions. You assume all investment risks and pay any associated management fees. This option is available through ARP or OPERS/STRS (in OPERS, it’s the Member-Directed Plan.)
What Makes You Most Comfortable?
What is your risk comfort-level? Note that there are no investment risk or management fees connected with a defined benefit plan, but you assume both investment risk and associated management fees with a defined contribution plan whether through ARP or OPERS/STRS. The June 14, 2008 issue of The Economist said, “In a defined-contribution scheme, the eventual pension depends on the investment performance of the fund that the employee has paid into—and he takes the risk of poor investment performance. By contrast, defined-benefit schemes promise employees a retirement income based on their pay and length of service. The employer takes the risk.”
With ARP, you open an account with a vendor approved by Ohio State and select investment options for both your and the university’s contributions. ARP provides a retirement investment program, but doesn’t offer benefits after retirement like OPERS/STRS. In other words, under a defined dontribution plan, your retirement benefit is determined by your account balance and the payment option you choose when you apply for benefits—this is the same with the defined contribution option of OPERS/STRS. The defined benefit plans of OPERS/STRS, on the other hand, determine your pension by your length of service, age, and salary.
Heath Care Considerations
Health care costs are a concern for everyone, regardless of your age, but they become increasingly important as you get older. Although it is not mandated by law, OPERS/STRS offer medical coverage in their defined benefit plans, but the defined contribution plans don’t, nor does ARP. At age 65, you become eligible for Medicare, but some supplemental insurance is needed.
Supplemental Retirement Account (SRA)
In addition to the retirement plans, you may establish a Supplemental Retirement Account (SRA) at any time during eligible employment. This is entirely voluntary on your part. These programs are allowed under the Internal Revenue Code and include the Deferred Compensation Program (Section 457) and Tax-Deferred Accounts (Sections 403(b) and 403(b)7).
The university doesn’t make contributions to SRAs. The amount you designate is deducted from your pay; earnings accumulate tax-free until you remove funds from the account. Federal and state taxes on both your contributions and earnings will be deferred until your account is distributed to you or a beneficiary. The benefit is determined by your account balance and the payment option(s) you choose when you apply to receive benefits.
When you leave the university, you may leave your accumulation with your carrier or roll it into an IRA with a different employer or financial institution. You choose the investments and assume the investment risks and the cost for any management fees (loads) associated with your investments. Fees vary from vendor to vendor—an important consideration when selecting one. Visit 403bwise.com to use a calculator to compare plans.
Additional Resources
Most importantly, be informed. The OHR web site has a wealth of information,
including retirement plan comparison charts for staff and faculty. Other sources include the state retirement systems’ web sites (opers.org or www.strsoh.org) and 403bwise.com, which keeps up on the 403(b) voluntary supplementary payroll deduction for retirement.