New Retirement Program for Faculty and Staff Hired
On or After July 2, 2012
The Institute-wide Planning Task Force was formed in 2009 to find creative ways to reduce overall expenses, as well as look for opportunities to make MIT even better. This led to a thorough evaluation of all major benefits at MIT by the Benefits Advisory Group, which included members of the faculty, senior leaders, and staff.
The group determined that our 401(k) plan has a high enrollment rate and is well understood and appreciated by the community. Our exceptional pension and retiree medical plans, however, were found to be complex and undervalued. In addition, the group found the long-run cost of these two plans could place substantial financial burdens on the Institute.
To address these issues, we will offer a new retirement program for those hired on or after July 2, 2012. The new program involves changes to the pension plan and the retiree medical plan. The 401(k) plan will remain unchanged.
This article outlines the rationale behind the new program and describes how it’s different from the current one. In designing the new program, we made sure our retirement benefits would remain substantive and competitive relative to our peers, while also remaining affordable for MIT.
The Essence of the Challenge –
Lowered Surplus and Rising EB Rate
MIT, like many other institutions, benefited from a strong stock market in the 1990s and into the 2000s. Rising stock prices, and skillful investment management, fueled growth in both MIT's endowment and pension assets. Our pension assets exceeded liabilities by $1 billion in 2007. This surplus benefited MIT by providing an accounting credit to actual pension costs, resulting in a reduced Employee Benefits (EB) rate.
Since the economic downturn of 2008, the funding status of MIT’s pension plan has changed significantly. The value of MIT’s pension assets has dropped because of the declining stock market, while the present value of our liabilities has increased because of the current low interest rates that are used to discount future obligations. As a result, the pension surplus was only $113 million in 2011. This change in funding contributed to a rise in the EB rate from 21% in FY09 to 26% in FY12. The EB rate is currently projected to reach 28% in FY13.
We are concerned that such an upward trend in our EB rate, if sustained, could affect MIT's competitive ability to attract research grants. At the same time, we recognize the need to offer competitive retirement benefits to newly recruited faculty and staff – and to honor our commitments to current employees. The proposed new retirement program, which will apply only to faculty and staff hired on or after July 2, 2012, is designed to improve long-run sustainability while offering retirement benefits that are comparable to those at the key institutions with which we compete, including Harvard, Princeton, Yale, and Stanford.
New Hire Design: MIT’s Pension Plan
MIT's 401(k) plan for new hires will remain the same as the current plan, and will provide a 100% match on participant contributions up to 5% of pay, subject to federal contribution limits.
For employees hired on or after July 2, 2012, MIT’s pension plan will be changing in the following ways:
- The new plan will offer a Cash Balance Benefit equal to the pension provided by the participant’s Cash Balance Account. As under the current plan, the Cash Balance Account will be credited with 5% of the participant’s pay each year plus interest. In addition, there will be an extra 5% credit each year on pay above the Social Security Taxable Wage Base ($106,800 in 2011). Several of our peer institutions include a feature like this in their retirement plans to make up for the fact that Social Security benefits do not recognize pay above the wage base.
The current pension plan provides retirees with the greater of a Cash Balance Benefit and a Career Pay Benefit of 1.65% of lifetime pay. The new plan will not include a Career Pay Benefit.
- The current plan provides an automatic cost of living adjustment (referred to as a “COLA”) equal to 75% of the increase in the Consumer Price Index every three years, to a maximum of 10%. In the new plan, retiring participants will have the option to choose a cost-of-living adjusted income stream of equivalent value to the fixed pension they would receive from the plan. In the new plan, the cost of inflation protection will be paid by the retiree; in the current plan, it is paid by MIT. This feature preserves the opportunity for a retiree to protect his or her retirement income against the risk of inflation.
- Under the current pension plan, eligible faculty and staff start earning retirement benefits as soon as they start working at MIT. Under the new plan, faculty and staff will start earning benefits 12 months after being hired.
New Hire Design: MIT’s Retiree Medical Plan
For employees hired on or after July 2, 2012, MIT’s retiree medical plan will be changing in the following ways:
- MIT’s current retiree medical plan is unusual among our peer institutions, and among employers in general, in requiring neither a deductible nor copayments from retirees. The new plan will require a $200 deductible for all services and retirees will be responsible for paying 20% of insurance not covered by Medicare. This means that if a retiree is charged $100 for a service after meeting the deductible, Medicare will pay $80, MIT will pay $16, and the retiree will pay $4. Retiree expenses should average $400 to $600 per year, and they will be capped at $1,000 annually per individual.
- Currently, MIT’s subsidy on the premium ranges from 50% to 70% for both the retiree and the retiree's spouse/partner, depending on the retiree’s length of service at MIT. In the new plan, the subsidy will be 50% for the spouse/partner but the retiree subsidy will be unchanged.
- Currently, MIT’s share of future premium increases is the same as the subsidy level (as much as 70%). In the new program, MIT will pay 50% of premium increases and the retiree will be responsible for the balance.
Keeping MIT’s Financial Future Strong
After much study and consideration, we believe the new program is a fair and equitable solution to the problem of balancing retiree needs and the fiscal challenges facing MIT. The changes are quite modest, and they keep MIT's benefit programs in a competitive position. These changes will reduce our EB rate by about 1.5 percentage points on an ongoing basis.
The stock market continues to be volatile. If we experience another major drop in the value of our endowment and pension assets, we may have to re-evaluate some of the provisions of our current benefits program for active faculty and staff. If this becomes necessary, we would introduce changes on a gradual basis to minimize the impact on individuals near retirement age. For now, our plan is to continue the existing benefit program for current faculty and staff and offer a modified but still very competitive program for new members of the community beginning next year.