Too many Americans are financially ill-prepared for retirement. This year’s annual survey by the Employee Benefit Research Institute, found only 21% of respondents were “very confident” they will have enough money in retirement, and a large majority are behind where they should be with their savings. [i]
As PLANSPONSOR recently noted, 401(k) plans are under new scrutiny following Ted Benna’s comments, prompting new questions about options people have. Based on my professional experience as a university president and personal experience being semi-retired, I believe a variety of options and annuities are a crucial part of the retirement savings mix that should be offered to faculty and staff, employed by higher education institutions. Most likely, people employed by higher education institutions are better positioned for retirement in part due to the better-than-average savings options most schools have traditionally offered. What matters, as much as total savings, is that people have options that are right for them.
Choice is a Crucial Component in the Total Benefit Package for University Employees
Having served as President of the Thunderbird School of Management, President of Colorado State University, and Dean of Arizona State University’s W.P. Carey School of Business, I regard university retirement packages as fundamentally different from those in the private sector. They are usually better. Many schools offer matches to retirement contributions well above what most private-sector employers offer and a large number of employees often make the maximum allowable contribution, wisely so.[ii] The outstanding retirement options are rightly regarded by faculty and staff as an appealing aspect of university employment and an important component of their compensation package.[iii] Universities also offer lifetime income guarantees (annuities) at a much higher proportion than in the private sector.[iv] Providing this option responds to many employees’ preference for a guaranteed income option akin to pensions for public sector employees and what formerly was offered by some large corporations.
At the heart of the retirement offerings is a variety of choices. Higher-education retirement plans should provide the opportunity to diversify portfolios and select a mix of securities aligned with individual employee’s circumstances. Faculty and staff of differing ages rightly possess widely varying tolerances for risk in their retirement investments. Younger workers, for example, may very well select a higher proportion of equity options, as they are better able to ride out the ups and downs of the stock market. Older workers often perceive that they are better off playing it more safely with a higher mix of fixed income options and government bonds. The variable tolerance for risk and differing preferences of individuals are the reason they deserve 403(b) plans with options, including annuities as a part of the mix.NEXT: The importance of annuities
[ii] Plan Sponsor Council of America, 403(b) Plan Report, 2016; Plan Sponsor Council of America, 58th Annual Survey of Profit Sharing and 401(k) Plans, 2015 (According to Plan Sponsor Council of America, the average salary deferral rate for higher education 403(b) plan participants was 6.9 percent, while the average percentage of salary deferred for all active 401(k) participants was 6.3 percent. Additionally, the average maximum employer matching contribution to participants’ 403(b) plans was 7.5 percent within the higher education industry, while the average maximum employer matching contributions allowed by 401(k) plans is 3.9 percent.)
[iii] Paul Yakoboski “Findings from the Retirement Confidence Survey of College and University Faculty,” TIAA Institute, 2005; Paul Yakoboski, “Retirement Confidence on Campus: The 2011 Higher Education Retirement Confidence Survey,” TIAA Institute, 2011
[iv] U.S. Department of Labor, Employee Benefits Security Administration, Report, “What You Should Know About Your Retirement Plan,” 2013; Jonathan Barry Forman, “Removing the Legal Impediments to Offering Lifetime Annuities in U.S. Pension Plans,” Working Paper, Expected publication Winter 2017. (Among public colleges and universities with a primary defined contribution plan “almost all offer annuitization as a retirement payout option, though few require some degree of annuitization. As of 2010, only 18 percent of private industry workers had annuities available to them.)
The Importance of Annuities: Guaranteed Income Stream for Life
People often prefer annuities over retirement options such as 401(k)s or mutual funds for several reasons.[i] One is that annuities provide lifetime income. Given today’s life expectancy, people are comforted knowing they will not outlive their savings. Another reason is that annuities free retirees of the burden of managing investment risk so that there will be adequate funds throughout their retirement. Some retirees like having the chance to capture market gains. But many do not. For example, my wife has a guaranteed income from her retirement. She likes the hands-off security it gives her. I have an annuity as well but I also have other funds in a variety of investment vehicles with varying levels of risk. I have a higher capacity for dealing with risk and like the opportunity to work with my financial adviser on modifications to my investment portfolio based on evolving market conditions.
I would urge universities to keep these distinctions in mind and refrain from discouraging annuity options altogether or limiting investment options too restrictively. One contention in the lawsuits is that higher education institutions can offer too many options. This is a matter that individual institutions and their stakeholders can determine on a case by case basis. At Thunderbird, working with Human Resources and our faculty, we actually expanded options somewhat. In addition, retirement savings plans can and should be tailored to fit the mission of an institution. Given Thunderbird’s focus on international business, many employees were particularly interested in investments aimed at emerging markets and European markets. Whatever works best for a particular school, I am certain that denying the annuity option, which remains popular and is so well-suited to the needs and preferences of many people, would be a disservice to employees and their families.
Responding to the Needs of Preferences of Tomorrow Retirees Today
As Americans live longer and struggle more to make sure they will have income for life, it is critically important to retain a host of options that fit economic needs, risk preferences, values, and financial literacy of individual employees at academic institutions. Reflecting on my experience, I am confident that senior administrators who work closely with their employees and Human Resources professionals will attend to the well-being of the employees in their communities. It is prudent to assess periodically retirement savings options, as we did at Thunderbird, to ensure that retirement options and plans are meeting employees’ needs. When annuity offerings meet the needs of employees, they should be maintained as an option. To abandon annuities altogether would undermine one of the most appealing aspects of working in higher education.
Yes, there is hope for American’s retirement security and let’s keep it that way by preserving any and all options for saving.
Larry Edward Penley, Ph.D., is President of Penley Consulting, LLC. Earlier he served as President of the Thunderbird School of Global Management, President of Colorado State University and Chancellor of the CSU System, and as Dean of Arizona State University’s W. P. Carey School of Business.NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Statements by the authors do not necessarily reflect the stance of Strategic Insight or its affiliates.
[i] When asked what finance-based changes are people willing to make in order to have a more comfortable and secure retirement? Seventy percent of Americans said they would look at financial products like annuities that provide the opportunity for a guaranteed income, while six in ten would adjust the timing of Social Security benefits. (Bank of America Merrill Lynch and Age Wave “FINANCES IN RETIREMENT: NEW CHALLENGES, NEW SOLUTIONS” February 2017)