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Overview of the Interim Report
The Benefits Office, in conjunction with the Strategic Review of Benefits Committee and the Committee on Faculty Administration, have developed proposals to deal with issues affecting the MIT Retirement Plan (MITRP). Some of the proposed changes are required to keep the plan tax-qualified, and were instituted on January 1, 1999; some offer increased flexibility to draw retirement benefits while working part time and increased benefits from a lowering of the normal retirement age to allow individuals to phase into retirement.
One component of the changes is a response to concerns that the plan’s investment options are too limited, with only the Fixed and Variable Fund available for managing participants’ accounts. The changes that provide access to a wider set of options will allow participants to build an investment portfolio to meet their individual needs. Finally, since the servicing of the plan has gotten beyond the capacity of MIT to manage, the plan administration will be outsourced.
These proposals for change have been presented to the MIT community in a variety of forums. But the issues are complex and constrained by legal and regulatory requirements. Some are highly technical, requiring considerable effort to master all the details. Therefore, the Faculty Policy Committee appointed this sub-committee to study the proposed changes, and to recommend modifications, if necessary, to meet expressed concerns.
The Committee is presenting an interim report on their findings to the Faculty Policy Committee, and distributing it to the faculty, and will follow with a final report in the spring when individual concerns have been received and the changes have been completely specified.
It is not the intention of the Committee to substitute its report for MITRP descriptions, documents, and the annual reports, which are available from the Benefits Office and on their Website, <http://web.mit.edu/benefits/www/>. Rather, we wish to lay a sufficient foundation for our observations and conclusions. We hope that the work of this committee will help in the discussion of the changes in progress.
In our review to date, we have concentrated on those issues that for legal and regulatory reasons had to be settled to meet a January 1, 1999 deadline, and other changes that were put in place at the same time. Four issues, among these several changes, have received most of our attention, and our conclusions about these items can be summarized as follows. Each is discussed in more detail in our report.
The Choice of Fidelity Investments to Manage the Defined Contribution/401(k) Assets. As of April 1, 1999, the management of this component of plan assets will be carried out using the services of Fidelity Investments to manage individual investment accounts for participants. We have reviewed the steps that the Benefits Office went through, seeking bids and negotiating fees, and we are comfortable with the procedure followed.
The Shifting of Investment Account Expenses from MIT to the Participants. This change will result in a small reduction in the growth of a participant’s ultimate retirement assets for those who remain invested in the funds that are "cloned" from the current Fixed and Variable Funds. The increased option to choose other funds with possibly higher returns may make up for this loss. All in all, it is our conclusion that this change, which puts us in line with almost all our competing institutions, is fair. We also believe that this change should be considered in balance with all of the changes, some of which increase benefits to participants.
Required Elimination of Fixed Fund Book Value, and Procedures for Accomplishing Change in Accounting for Certain Fixed-Fund Plan Assets to Current Market Value. To calculate the book value of member Fixed Fund accounts a five-year smoothing procedure for crediting capital gains was used by MIT to lower the volatility of credited returns. With the removal of the guarantee to pay at retirement the greater of the book value or market value, a portion of the capital gains of recent years had to be allocated to member accounts to bring them to market value as of January 1, 1999. We have reviewed the procedure used, and its potential for creating inequities between members of long standing and those who joined only recently, and found it to be a sound approach.
The (Mandated) Choice of an Index Outside MIT's Control For Calculating Returns on Certain Accounts. In the past, MIT has managed the assets that lay behind one component of the MIT-funded defined benefit account, and the rate of return on members’ accounts was based on MIT's actual investment results. The IRS now requires a non-MIT index for this purpose. MIT has chosen an alternative index, and specified maximum and minimum values, on a provisional basis. Discussion continues regarding the ultimate form of the index (which will be revised), and it is the Committee's judgment that this interim step is appropriate.
Several issues remain to be settled, and our Committee will follow them through the coming months. Key among these is the evolution of the system providing withdrawals, annuities, and lump sum distributions, the ultimate selection of the market index for the defined-benefit assets, and possible elimination of post-tax contributions to the defined-contribution component of the plan. Also, with the greater flexibility provided in the revised plan comes greater risk so that the extent and quality of the information provided to participants takes on greater importance.
In our interim report, we cover the key features of the changes made as of January 1, 1999, and further revisions to come in spring 1999 and beyond. We feel comfortable that the changes that went into effect on January 1, 1999 are fair.
We were aided in our deliberations by staff from the Benefits Office, the Personnel Office and the Treasurer’s Office. We thank them for their collegial and expert input to our understanding of these issues.
We solicit input from the faculty on our report and on the issues it raises.
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)
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