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From The Faculty Chair

Proposed Changes to Retirement Plan
Create Interest and Concern

Lotte Bailyn

The MIT Retirement Plan. Not usually of much interest to faculty except when they first come and enter the plan (where some decisions have to be made) and as they get close to retirement. Yet the way it works can make a big difference in one’s pension, as do the choices one makes along the way. That is why the contemplated changes to the Plan have created some interest and some concerns.

The MIT Retirement Plan consists of two plans, the Basic Plan – a defined benefit plan, and the Supplemental Plan – a contributory plan with a 401(k) feature. At the time of retirement, the Supplemental Plan provides about two-thirds of the total benefit if the long-term faculty member has contributed the maximum amount over his or her career.

The Basic Plan benefit generally is expressed as a fixed annuity payable at retirement. This annuity may increase due to the application of triennial cost-of-living adjustments. The Institute funds this benefit through periodic contributions to the Benefits Fund of the MITRP’s trust. The value of an account in the Supplemental Plan at retirement (where the contributions are defined, but not the benefits) depends on the allocation choices made by the faculty member between the Fixed and the Variable Funds, and the market value of the account at the time of retirement. Faculty have the opportunity to contribute 1% - 5% of salary to the Supplemental Plan. The Institute matches these contributions dollar-for-dollar. At retirement, faculty can take this amount out in cash, or can take a fixed or variable annuity, with the latter varying annually according to the market. There is no indexing to these annuities, although purchasing a variable annuity is a strategy designed to be responsive to inflationary pressures.

Like an account in the Supplemental Plan, accounts accumulated under the former Retirement Plan for Staff Members (RPSM) are invested in the Fixed and Variable Funds, and can be taken as fixed or variable annuities at retirement. Alternatively, two-thirds of RPSM accounts can be taken as cash at retirement.

On the whole, this plan has worked well for MIT faculty. The Institute has set annuity rates by a smoothing formula that limits the maximum quarterly increases or decreases to the annuity rate to .25%. This is helpful when rates are dropping, but works against the faculty when interest rates are rising. The Institute has provided record-keeping services and the trustees of the plan have guided the investment policy, even though almost all day-to-day investment decisions were made by outside firms. The Institute has picked up almost all the costs associated with the plan, such as investment, custodial, legal, and actuarial fees, instead of taking those out of the investment returns, which is done by TIAA/CREF and other retirement plans.

So, if everything is going well, why change? Certain practices must be amended in order to preserve our tax-qualified status. A tax-qualified plan allows us to contribute on a tax deferred basis, protects our accounts from creditors, and offers us special tax treatment on certain benefit payments. Second, for many faculty the options feel very limited, with only the choices of the Fixed and Variable Fund to choose from (and no ability to move between them until age 55 and then only in the direction of Variable to Fixed). Faculty feel they are not getting all the returns they might, and do not have additional options that would allow them to build an investment portfolio to meet their needs. Finally, the servicing of the plan has gotten beyond the capacity of MIT to manage, and the question arises as to whether the mission of MIT should include being in the business of 401(k) record keeping.

So the Benefits Office, in consultation with the Strategic Review of Benefits Committee and the Committee on Faculty Administration (both of which include faculty members), has come up with a set of proposals to deal with these issues. Some of the proposed changes are required to keep the plan tax-qualified, and will be instituted by January 1, 1999. Changes that are mandatory as well as some improvements to the plan (e.g., immediate 100% vesting) are being announced by the Benefits Office. The net effect results in little, if any, change in the pensions that will be available to faculty.

Some other proposed changes are meant to deal with the request for more options and better services by outsourcing the administration and the management of the plan to an outside financial services institution, such as Fidelity. This will be seen as a benefit by many faculty who have asked for this, but also may be of concern to other faculty who are not financially sophisticated and prefer the more limited choices that seem safer to them. For these people, the proposed changes allow for the continuation of the current Fixed and Variable Funds. The investment guidelines of the "cloned" Fixed and Variable Funds will continue to be set by MIT, and day-to-day investment decisions would now be made by the financial services company that is administering the plan. A potential concern of this for the accumulation in faculty pension accounts is that expenses of managing these funds would now be taken out of gross investment returns, which could adversely affect final accumulations for faculty now at the beginning of their MIT careers.

Another expressed concern has been that an outside firm would not set annuity rates using the same formula that MIT has been using to set them, and would therefore subject retiring faculty to greater risk from interest rate fluctuations. To meet this concern, MIT will provide retirees with a choice, for a period of time, between using an MIT-set annuity rate or the commercial one. Which is higher will depend on whether interest rates are going up (which would favor the commercial rate) or down, since by design the MIT rate is slower to respond to interest rate changes.

There are many other proposed changes, including some designed to help early retirement, and the details are complex. The Benefits Office has been meeting with various groups in the Institute to explain the outlines of the changes and to solicit comments and concerns. But it takes more than one session to fully understand the implications of all the proposed changes. For this reason, the Faculty Policy Committee has appointed a sub-committee to take a close look at these proposals, to see how they differ from the current plan in terms of changes in amounts and in risks, and to recommend modifications, if necessary, to meet faculty concerns. The committee is being asked to write a report on their findings for the Faculty Policy Committee, and will give an interim report along with a discussion of the proposed changes in an upcoming faculty meeting.

The committee consists of the following:

Sheila Widnall, chair (sheila@mit.edu)

Peter Diamond (pdiamond@mit.edu)

Paul Gray (pogo@mit.edu)

Henry Jacoby (hjacoby@mit.edu)

Edwin Thomas (elt@mit.edu)

Roy Welsch (rwelsch@mit.edu)

Please feel free to get in touch with any of them if you have concerns about this, or you may also get in touch with me (lbailyn@mit.edu) since I will be sitting in with the committee.

We hope to have this settled early in the next year so that the agreed-upon changes can be implemented by April.

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