New Policies Offer Pension Choices To Academic Scientists

Rare is the scientist who embarks on a career in academia purely for the money. On the other hand, money can surely be a key factor in deciding when to leave that career, especially in light of revised pension policies and retirement laws. Consider the following: By working one year beyond the traditional retirement age of 65, a university researcher with 30 years of service conceivably can add as much as $50,000 to his or her pension fund, in addition to collecting a regular annual salary. As of Jan. 1, 1994, faculty will no longer be required to retire at age 70. At age 70 1/2, however, most academicians will be required to begin drawing pension annuities, thus increasing their tax liabilities. Under recently revamped pension policies, some academic scientists will have the option of "cashing out" accumulated pension funds upon retiring. In doing so, they would receive a lump sum of taxable cash, which might be used, among other ways, to launch a new business or a second career. Taken together, these and other new provisions in higher education pension plans are cause for university researchers to start planning now for their retirement years. If they don't, university administrators and investment experts say, they could lose out on financial gains that might accrue under the new policies. "Now is a good opportunity to stop, look, and listen to what's going on with pensions in higher education," says Brian Mattes, vice president of the Vanguard Group, a mutual funds company in Valley Forge, Pa. "Unfortunately, though, most people set up a pension policy and then don't look at it again for another five or 10 years." University employees' new pension choices stem almost entirely from policy changes made by the Teachers Insurance and Annuity Association and College Retirement Equities Fund, or TIAA-CREF, a New York-based nonprofit company founded in 1918 specifically to provide retirement services to educational institutions and other nonprofit organizations. Today, with more than 1 million policyholders - the vast majority of whom are academics - the company offers two funds: TIAA, a fixed investment fund; and CREF, a stock fund to which both employees and their employers contribute. Together, these funds represent the basic pension plans offered by virtually all of the nation's 4,000-plus colleges and universities. How much is enough for retirement? The standard rule is that pensions should provide an employee with annual payments that range between two thirds and 70% of his or her average annual lifetime salary. How this amount is accumulated varies widely between academia and industry. Unlike their colleagues in industry, scientists in academia enjoy a fair amount of flexibility when it comes to planning for retirement income. This is because virtually all colleges and universities offer what is known in employee benefits circles as a defined contribution pension plan. It most often works this way: Employees contribute a certain amount to their pension accounts - say, 5% of their pretaxed annual salary. Their employers then match that contribution, up to a standard ceiling of 10%. In some cases, academic institutions may require that employees salt away at least 5% of their annual salary to be eligible for the standard 10% maximum employer contribution. In all cases, however, the employee decides how much he or she will contribute to pension funds. Higher-education pension plans also are "portable." This means that whatever amount employees accrue while working at one institution follows them to their next place of employment. For instance, if a chemistry professor at Stanford University has accrued $10,000 in his account after five years of service, then accepts a faculty position at Harvard University, his $10,000 is added to the account that is opened for him at Harvard. By comparison, most employers in industry offer defined benefit plans. Under this arrangement, employers do not contribute to an individual's retirement account. Rather, a retiree receives a pension based on years of service and average annual salary. Typically, these plans provide for employees to receive 2% of their average annual salary for each year of service. For example, a biologist with 25 years of service whose salary averaged $50,000 would receive 50% of $50,000, or an annual pension of $25,000. Unlike their counterparts in academia, pensions in industry are not portable. Also, employers in industry usually require employees to work an average of five years before becoming "vested," or eligible to collect pension benefits. If a scientist works only four years before leaving the company, he receives nothing. When he moves to another position, whether in industry or in academia, he must start rebuilding his retirement income from zero. Given the increased mobility of all workers, investment executives report that gradually, industries are phasing out defined benefit plans in favor of defined contribution plans. According to Brian Mattes, vice president of the Vanguard Group, based in Valley Forge, Pa., almost all new companies are opting for defined contribution plans. Many of these firms have maintained a scaled-down vesting policy, which requires that employees work at least a year before the company will begin contributing to their pension funds. --J.K. Beginning in March, TIAA-CREF will give its policyholders unprecedented control over their individual retirement accounts by allowing them to transfer accumulated funds, or "old money," to mutual funds, bond accounts, and other investment instruments offered by competing companies. Additionally, TIAA-CREF policyholders will have the option of receiving money they have invested in the CREF stock fund in a single lump-sum payout upon retirement. Both of these changes represent a landmark policy reversal for TIAA-CREF, which since its founding has prohibited money transfers to outside funds and has restricted transfers between its own fixed income and more volatile stock funds. Up until now, for example, employees could not transfer money they had invested in TIAA to take advantage of a booming stock market. They could, however, take money from the CREF stock fund and place it in the fixed-income account. Also, under the old rules, policyholders could receive only 10% of their pension money upon their retirement, with the rest doled out in annuity payments. According to Robert Wilson, vice president for personnel at Johns Hopkins University and a longtime critic of the restrictions that were in place at TIAA-CREF, these changes are nothing short of monumental, because they provide policyholders with heretofore unheard-of control and flexibility in planning their financial future. For example, under the new rules, younger professors who are just starting out in their careers can choose to invest their pension contributions in higher-risk stock funds rather than the more stable bond and fixed-income accounts preferred by those approaching retirement age. Moreover, all policyholders will now have the opportunity to move around their con- tributions in response to market fluctuations. There is a catch, however. For individuals to take advantage of the new TIAA-CREF policies, the policies must first be adopted by the university where the professors are employed. One reason it is so important for faculty to inform themselves about the new pension options is so they can lobby their employers for those plans they want. Not surprisingly, the opening up of the higher-education pension market comes as good news to TIAA-CREF's competitors, some of whom have already gained a foothold at universities that offer their various funds as an alternative to TIAA-CREF's investment accounts. Now, these companies are vying for an even greater portion of the billion-dollar educational pension market, offering a wide array of investment options, including actively managed mutual stock funds, government bond funds, and money market accounts to which employees can contribute as part of their basic pension plans. "With over 30 different kinds of funds, what we're offering employees is choice," says Vanguard's Mattes. A second advantage of funds offered through outside companies is that these accounts are actively managed, he adds. This means that an employee's money is moved around in response to market projections formulated by investment analysts, whose job is to track investment performance on a daily basis. The bulk of CREF funds, by comparison, is passively managed, meaning that the funds seek only to match the performance of a certain market index, such as the Standard & Poor index. Among academic investors, there are critics of what some say is TIAA-CREF's conservative approach to investing. One such critic is Calvin Lang, a 64-year-old professor of biochemistry at the University of Louisville. Throughout his career, Lang has invested 100% of his pension money in the stock market through CREF. "The TIAA fixed-income account may be safe, but you're actually losing money by investing in it, because it doesn't take inflation into account," he says. The following is a list of the major companies that offer defined contribution retirement plans at colleges, universities, and other nonprofit institutions. On some campuses, these companies' plans are offered as alternatives to TIAA-CREF's basic pension plan. On other campuses, these plans are available as supplemental pension programs to which employees make contributions on a voluntary basis. This list represents a sampling only. The Vanguard Group Vanguard Financial Center Valley Forge, Pa. 19482 (215) 648-6000 Fidelity Investments 82 Devonshire St. Boston, Mass. 02109 (617) 570-5600 T. Rowe Price Associates Inc. 100 E. Pratt St. Baltimore, Md. 21207 (301) 547-2000 Dreyfus Benefits 666 Old Country Rd. Garden City, N.Y. 11530 (800) 332-6880 Lang also opposes TIAA-CREF's annuity system. "The reason is that you never get 100% of your money. Eventually, when you're 95, you may get 90% of it back, but you never get it all," he says, adding that he believes all policyholders - regardless of where their money is invested - should be entitled to receive lump-sum cash payments upon retiring. For this reason, Lang welcomes the TIAA-CREF policy change that, as of March 1, allows retirees to receive in a lump sum all CREF-invested funds, as long as lump-sum disbursements are permitted by their employers. Eventually, the biochemistry professor hopes to see the same policy apply to money invested in the TIAA portion of the fund. In response to competition from outside companies and to investors' demands for a wider array of investment choices, TIAA-CREF will be offering a variety of new investment instruments, according to John McCormack, a TIAA-CREF executive vice president in charge of pension and annuity services. Earlier this year, the company introduced a new bond market account and a social choice account, which invests in the stock of companies that "conduct their activities in a manner that recognizes acceptable standards for addressing specified social concerns." Among other criteria, these are companies that have no economic ties to South Africa and that are not involved in weapons manufacturing or producing or marketing alcohol or tobacco. While new outside funds and the transfer and cash-out options have been made available by TIAA-CREF as of March 1, they will not necessarily be implemented immediately on all campuses, according to McCormack. Rather, universities must first adopt the revised policies on a campus-by-campus basis. Similarly, universities have the final say in whether to allow TIAA-CREF's competitors to offer investment alternatives. As McCormack sees it, the majority of universities most likely will adopt TIAA-CREF's two new investment funds, but because the transfer and cash-out options represent "major changes," most institutions will delay making a decision on them. Washington University in St. Louis is among those institutions that have adopted a "wait and see" approach on both the outside money transfer and cash-out choices. According to Gloria White, vice chancellor for personnel, there are two reasons for doing so. First, White notes that the administrative work involved in providing alternative investment plans, such as those offered by Vanguard, can be substantial. For example, new plan documents would have to be drawn up at the expense of the university, which also must furnish employee counseling on any new pension plan or company. (For their part, many of TIAA-CREF's competitors, including Vanguard and Boston-based Fidelity Investments, are looking to overcome this obstacle by offering employee pension education programs as part of their services.) Secondly, White explains that transferring funds from TIAA-CREF portfolios to outside com-panies' accounts may not be in either an employee's or a university's best interest. "The objective of a pension is to build up retirement income over a long period of time by making the proper investments. By switching money from fund to fund, it's not likely that you'll get the best return," she says. As for the cash-out option, White says it runs contrary to the very purpose of a pension plan. "The TIAA-CREF plan is there to provide for retirement, not to provide investment income," she says. "There are those people that may want 100% cash, and, granted, there are people who are perfectly capable of making a decision about their own money. On the other hand, every employee doesn't have that kind of sophistication. The big problem is how to meet the two needs of letting people make their own choices and providing them retirement income." In trying to balance these two goals, White concedes that higher education has been accused of being too paternalistic when it comes to retirement funds. "But it's that same paternalism that might lead an employee [who has cashed out] to come back to us and say, `You should have taken care of me,' " she adds. New TIAA-CREF provisions are not the only thing worrying university administrators like White these days. The 1994 abolition of mandatory retirement for professors 70 years and older also has the potential to wreak havoc on institutions' pension budgets. Coupled with a law requiring schools to contribute annually to all workers' pension funds - regardless of their age - uncapping retirement age provides an enormous financial incentive for academics to remain on the job beyond the average retirement age of 65. As Ernest Benjamin, general secretary of the American Association of University Professors (AAUP), points out, "By staying on an extra one, two, or three years, an employee can add substantially to his retirement income." By way of example, Hopkins' Wilson offers the theoretical case of a 65-year-old physics professor who, after 30 years of service, has accumulated $500,000 in his pension account between his own annual 10% salary contributions and matching contributions from his employer. By remaining on the job another year, he will earn an average 10% return on his $500,000. In addition (assuming an annual salary of $75,000), another $7,500 will be added by the university for that year. Total annual accumulation: $57,500. "By staying on another year, his nest egg has gone up by more than $50,000," Wilson notes. "With that kind of incentive, the question is how do you keep people from staying on?" Benjamin says that both the National Academy of Sciences and AAUP are studying this question. Additionally, AAUP has issued a statement of principles on academic retirement and insurance plans, which recommends that universities develop attractive voluntary retirement programs. These are programs that should enable individuals who are approaching retirement to arrange, on their own initiative, reductions in services and salary acceptable both to them and their institutions, according to the AAUP statement. What it comes down to, according to Hopkins' Wilson, is that "institutions are looking at incentive retirement plans to persuade old Joes to take retirement - in other words, ways to buy out their tenure." Not all senior faculty can be induced by money alone - especially scientific researchers, says Wilson. "The nature of people in research is that they have set down deep roots in their discipline and with their colleagues," he notes. "They have a great reluctance to give up the life they love. This is why nonfinancial considerations are also important. It's very hard to design incentive plans to move people out, because money isn't everything." AAUP also recognizes this reluctance, which is why it is recommending that institutions provide nonmonetary retirement incentives as well. "The continuation of medical insurance and other fringe benefits may make retirement more attractive to faculty without increasing their tax liability," says Benjamin. In its statement, AAUP suggests several additional modest benefits, including allowing retirees to maintain their professional identities, activities, and collegial relationships. For the time being, universities have yet to reach a consensus concerning AAUP's suggested retirement incentives. Similarly, most institutions have not made any firm decisions on the new TIAA-CREF provisions. According to Washington University's White, this is a good thing. "By delaying a decision, we as institutions are forcing people to think about their retirement now," she says. Julia King is a freelance science writer based in Ridley Park, Pa.

New Policies Offer Pension Choices To Academic Scientists

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