New Faculty Retirement Workshop 2007-2008

INTER FACULTY ORGANIZATION

2007 WORKSHOP

RETIREMENT ISSUES

FOR

NEW FACULTY

Presented By:

Russ Stanton, Director of Government Relations

Inter Faculty Organization

Disclaimer: This workshop is being conducted by the Inter Faculty Organization (IFO), the exclusive representative of the faculty at the Minnesota state universities, as a service to its members. The views expressed either verbally or in writing are those of the representative of the IFO not the Minnesota State Colleges and Universities (MnSCU) or any of its affiliated institutions. The IFO and its representatives do not sell or endorse any investment product or service and do not receive any fees, commissions or financial reimbursement from any vendor of investment products or services. This workshop is designed to familiarize faculty with options available to them under their retirement plans and collective bargaining contract-it is not to be constructed as financial planning. The IFO encourages all members to seek financial advice from a licensed financial planner.

TABLE OF CONTENTS

PURPOSE OF NEW FACULTY RETIREMENT WORKSHOP

MNSCU RETIREMENT PLANS FOR FACULTY

TRA VS. IRAP IMPORTANT CONSIDERATIONS

INDIVIDUAL RETIREMENT ACCOUNT PLAN INVESTMENTS PERFORMANCE

TRA EARLY RETIREMENT REDUCTION FACTORS

COMMON SENSE ABOUT INVESTING

TIAA-CREF RATES OF RETURN: NOMINAL VS. REAL

PROJECTED IRAP ACCUMULATIONS -- STOCKS

PROJECTED IRAP ACCUMULATIONS -- BONDS

PROJECTED ACCUMULATIONS USING VANGUARD INSTITUTIONAL INDEX FEES

PROJECTED ACCUMULATIONS USING LEGG MASON VALUE FUND FEES

VOLUNTARY TAX SHELTERING

MN DEFERRED COMPENSATION PLAN INVESTMENT OPTIONS

RETIREE HEALTH CARE

IMPORTANT PHONE NUMBERS & WEBSITES

PURPOSE OF THIS RETIREMENT WORKSHOP

1. To give you a general overview of your retirement programs, with particular emphasis on the decisions you must make in the near future.

2. To help you make an informed decision between TRA or IRAP as your basic pension coverage.

All new faculty members will start out in the Individual Retirement Account Plan (IRAP) as their basic pension plan.

You have up to one year to choose the Teachers Retirement Association (TRA) instead of the IRAP as your basic pension plan.

If you choose TRA as your pension plan, it is irrevocable for life.

If you don’t make a choice you will remain in IRAP. If a faculty member chooses IRAP, either through an active choice or through default after one year, the decision is irrevocable for life.

The choice you make can mean the difference to you of thousands of dollars in the short term and hundreds of thousands of dollars over the course of your career. It can also affect the portability of your pension and your ability to change jobs without severe consequences to your retirement income. The IFO wants you to make a careful and informed decision that best fits your career plans.

3. To help you select appropriate investment funds under the IRAP or Supplemental Retirement programs.

Faculty in the IRAP and Supplemental Retirement programs must choose between 23 investment funds offered by three different vendors. These include a range of assets types (stocks, bonds, money market, balanced funds, etc.). The IFO wants you to select an investment strategy that is appropriate for you.

4. To inform you of some large tax shelters and tax breaks available to you through the Tax Sheltered Annuity Program, the State Deferred Compensation Program, and the Post Retirement Healthcare Savings Plan.

The Inter Faculty Organization is the union for the faculty at Minnesota’s seven state universities. The IFO is an informed, objective source of information. The IFO does not endorse or sell any products or services, or receive fees or commissions relative to retirement. Our purpose in providing this workshop is to improve the economic welfare of the faculty.

MnSCU Retirement Plans for Faculty

Level 1. Social Security

(Mandatory for all new faculty.)

_____________________________________________________________________________

Level 2. Basic Pension Plan

(All new faculty who work more than 25% time must choose-the default is IRAP.)

INDIVIDUAL RETIREMENT or Teachers Retirement Association
ACCOUNT Plan (IRAP)

Managed for MnSCU by TIAA-CREF
10 TIAA-CREF funds
6 Vanguard Index Funds
7 “Best in Class” Mutual Funds
(a wide variety of asset types: stocks, bonds, real estate, fixed)

One year to make an irrevocable choice – IRAP is the default.

_____________________________________________________________________________

Level 3. Supplemental Retirement Plan (SRP)

(Automatic coverage for all faculty members after two years of full-time employment.)

- Managed for MnSCU by TIAA-CREF
- Same set of vendors and funds as IRAP
The current contribution is 5% of salary over $6,000 per year, up to $2250/year
This amount is matched 100% by the employer.

_____________________________________________________________________________

Level 4. Voluntary Tax Sheltered Savings Plans

Tax Sheltered Annuities             AND/OR       Deferred Compensation
(Also known as TSAs, 403(b)                           (Also known as 457 Plans)
Plans, TDAs, etc.)

- Managed for MnSCU by TIAA-CREF - Managed by MN State
- Same funds as IRAP and SRP Retirement System (MSRS)
- Roth and/or Traditional Options

_____________________________________________________________________________

Level 5. Postretirement Healthcare Savings Plan

- Severance Pay
- Health Reimbursement Arrangements

*The IRAP and Supplemental Retirement Plans are administered jointly by TIAA-CREF, and are referred to as the “MnSCU Defined Contribution Plan” or the “MnSCU DCR Plan.”

TRA vs. IRAP
Important Considerations

Feature	TRA	IRAP
How the plan works	TRA is a defined benefit, or formula plan. Assets are held collectively and invested by the State Board of Investment. Your benefit is based on a formula that is based on the average of your highest consecutive five years of salary. You get an annual retirement benefit at normal retirement age (age 66) that is equal to 1.9% of your high-5 average salary for each year of service.	You have your own individual account into which both your contributions and your employer contributions are deposited. You choose where to invest your funds from an array of 23 funds, including money market, bond, stock, balanced, real estate, and international funds (see list and performance data on page 6). Your retirement benefits are based on how much you accumulate in your account from contributions and interest.
Contributions	5.5% employer/5.5% employee	6% employer/4.5% employee
Vesting	After 3 years. If you do not vest you can withdraw your own contributions, (not the employer’s contributions) and interest on your contributions at the rate of 6%.	Both employer and employee contributions plus interest are immediately vested and belong to the employee.
Portability	Not very portable unless you go to work for another public employer within Minnesota. If you change jobs and move to another state or to the private sector, you can leave your contributions with TRA and begin drawing a reduced benefit at age 55, or an unreduced benefit at age 66, but your high-5 salary will be the salary you earned before you moved, so it will be eroded by inflation. To offset this inflation erosion, TRA augments the benefit by 2.5% for each year it was deferred prior to retirement. If you withdraw before retirement you will get your own money back at 6% interest. You will forfeit the employer’s share.	Very portable. If you change jobs mid-career you can either withdraw all the proceeds of your account (employer and employee) and roll it into a IRA rollover, or transfer it to the pension plan of a new employer (if they allow it), or you can simply leave your money in the plan until you retire and it will grow at the rate of investment return.
Risk	The primary risk is that you would lose or change jobs mid-career, which can have a serious adverse affect on your retirement benefits. A second kind of risk is that your salary could grow at a slow rate. If this happens (and it happened in the last decade), “high-5” salaries increase slowly and therefore benefits grow slowly. Finally, the flip side of risk is reward: while you are protected from the market going down, you will not directly benefit from higher than normal market returns.	You bear the risk of investment. If you invest wisely you can benefit from this, but if you don’t, you bear the consequences at retirement.
Withdrawal Options at Retirement	You can only take your benefit in the form of a lifetime annuity (monthly income). You can choose from a variety of annuity options offered by TRA, such as a single life annuity, joint and survivor annuities, etc.	Very flexible withdrawal options, including annuities, lump sum withdrawals, interest only withdrawals, periodic payments, or combinations of the above.
Post Retirement Cost of Living Adjustments (COLA’s)	TRAs post retirement COLA formula is based on the rate of return on the Post-Retirement Fund. Future increases are expected to be around 2.5% per year.	IRAP members can leave their money invested and it will grow at the rate of investment return until it is withdrawn. They can also purchase annuities with COLA’s.
Early Retirement Penalties	TRAs “normal” retirement age is tied to the social security retirement age, and is gradually increasing to age 66. If you retire earlier than the normal retirement age, your retirement benefit is reduced (see chart on page 7), for each year you retire prior to the normal retirement age. For instance, if you retire at age 55 your retirement benefit is only 55.1% of what it would be if you retired at age 66.	There are no early retirement penalties, but the earlier you retire the less money you will have accumulated in your retirement account.
Generalizations	TRA is attractive for employees who think they will work in TRA covered employment throughout their career and retire close to TRAs normal retirement age. It is an attractive alternative to people who are risk adverse when it comes to investments.	IRAP is attractive to people who think they are likely to change employers prior to retirement or who retire early. Its greatest attraction is its portability. IRAP is also attractive to people who like flexibility in investment and retirement options and who are not risk adverse when it comes to investments.

The information above on investment fund performance is taken from the TIAA-CREF web page (http://enroll.tiaa-cref.org/Resources/ppc/html/993/?microsite=mnscu). Please visit this web page and read the complete chart, including footnotes, prior to making any investment decisions.

In addition to the expense ratio (investment fees) charged by the funds, MnSCU charges a $20/person annual administrative fee to cover recordkeeping costs and management of the plan.

1. Invest for the long term. Put a sizeable portion of your investment in equities (stocks), which have a high long term yield compared to fixed interest investments and bonds. Ignore the short term volatility--you should be concerned about what has the highest average yield in the long term. You will almost certainly have times when the market goes down, but if you are young, you can ride out the downswings.

2. Diversify. Each of the investment funds available to you is diversified among many companies. However, you may want to diversify among asset types, such as real estate, bonds, and international investments, to reduce overall volatility of returns on your portfolio. How much you diversify depends on your risk tolerance and years from retirement.

3. Don’t play the markets. Pick an asset allocation strategy and stick with it. By the time information relevant to making investment decisions reaches the average investor, the markets have already adjusted to the change. People’s instincts tend to be to want to buy when the market is going up and to sell when it is going down--just the opposite of “buy low--sell high”.

4. Consider broad based index funds. Index funds tend to beat actively invested money of the same type about 85%of the time. Because they aren’t paying as much for high priced fund managers, index funds have lower fees.

5. Rebalance your asset allocations periodically. Because some asset types will increase faster or slower than others, your allocation percentages will get out of whack with your strategy. When you rebalance you asset allocations, you will be selling shares that are up in value to buy shares that are down in value--that’s a good strategy. Stick to your long term allocation strategy.

The Postretirement Health Care Savings Plan (HCSP)
Faculty members are covered by a postretirement Health Care Savings Plan. Money contributed to the HCSP is tax-free (not just tax deferred) so long as it is used for health related expenses (deductibles, co-pays, Medicare premiums, Medicare supplement premiums, eye glasses, etc.). Money in the postretirement Health Care Savings Plan is invested and earns interest.

Currently, two types of contributions go into the postretirement Health Care Savings Plan:

Health Reimbursement Arrangements (HRAs)
All insurance eligible faculty (1/2 time or more) will receive a $600 employer contribution to their HRA account on January 1st of each year, to cover medical expenses not covered by insurance (deductibles, co-pays, eyeglasses, hearing devices, etc.). Employees submit claims and are reimbursed from their accounts.

Unused balances in the HRA account carry forward and may be used in the subsequent year.

If at the beginning of a year an employee has less than $500 in their HRA account, the employee will have $600 added to their HRA account by the employer. If the employee has more than $500 in their HRA account the $600 will be added to their postretirement Health Care Savings Plan.

By controlling their healthcare expenses during years of employment, employees can accumulate tax-free savings for their health care expenses following separation from employment.

Voluntary Flexible Spending Accounts (FSAs)
Employees can voluntarily set aside some of their own money through payroll deduction to pay for their uncovered medical expenses on a non-taxed basis through what are called Flexible Spending Accounts or FSAs. This is a great tax break, but FSAs have one major weakness—the balances in the FSA accounts at the end of a calendar year do not carry forward to the year—they are forfeited to the employer.

Both the HRA and FSA programs are managed by Eide Bailly, and are coordinated so that if a member has an FSA, claims will be paid first from the FSA account (because it doesn’t carry forward to the next year) and then from the HRA account (because it does carry forward). You can open an FSA account upon the start of employment or during open enrollment in November of each year. Informational materials will be sent out prior to open enrollment.

TEACHERS RETIREMENT ASSOCIATION:
651-296-2409
800-657-3669
www.tra.state.mn.us

TIAA-CREF:
800-682-8969
www.tiaa-cref.org/mnscu
Establish your account at: http://www.tiaa-cref.org/sredirect/myaccounts_login.html

INTER FACULTY ORGANIZATION:
Russ Stanton, Director of Government Relations
651-227-8442, ext. #14
800-325-9644, ext. #14
stanton@ifo.org (e-mail)
www.ifo.org (web page)

MnSCU:
Gary Janikowski, System Director of Personnel
651-297-5540
gary.janikowski@so.mnscu.edu (e-mail)
www.hr.mnscu.edu/retirement (MnSCU web site)

CAMPUS CONTACTS:
Bemidji, Linda Gilsrud (218-755-3966)
lgilsrud@bemidjistate.edu

Minnesota State Deferred Compensation Plan
Dave Ochs
dave.ochs@state.mn.us
612-247-6597 (cell)
or
Mike Ragatz
michael.ragatz@state.mn.us
612-247-6632 (cell)

Eide Bailly (HRA & FSA Administrators) www.eidebailly.com
5601 Green Valley Drive, Suite 710
Minneapolis, MN 55437-1145
952-944-6633 (phone)
800-300-1672 (toll-free)

	% TOTAL RETURNS		% AVERAGE ANNUAL TOTAL RETURNS			% Gross Expense Ratio
	3-month	YTD	1 Year	5 Years	10 Years	% Gross Expense Ratio
TIAA Traditional Account	-	-	5.33	5.33	6.58	-
CREF Money Market Account	1.23	2.45	5.01	2.51	3.68	0.40
Vanguard Prime Money Market Fund	1.31	2.63	5.39	2.84	3.96	0.09
CREF Inflation-Linked Bond Account	-0.89	1.47	3.53	5.58	-	0.45
CREF Bond Market Account	-0.58	0.80	5.79	4.39	5.86	0.45
Western Asset Core Plus Bond	-1.16	0.25	7.06	6.42	-	0.45
Vanguard Total Bond Market Fund	-0.63	0.84	6.20	4.31	5.86	0.07
TIAA Real Estate Account	3.31	7.47	13.43	11.40	9.82	0.79
CREF Social Choice Account	2.66	3.89	13.08	8.72	6.97	0.43
Dodge & Cox Balanced Fund	3.67	5.35	15.24	11.78	11.09	0.52
Vanguard Balanced Index Fund	3.38	4.86	14.52	9.07	-	0.08
Vanguard Institutional Index Fund	6.27	6.94	20.55	10.72	7.17	0.05
CREF Stock Account	6.30	8.73	22.19	12.72	7.56	0.47
CREF Equity Index Account	5.65	6.88	19.53	11.06	7.30	0.41
Vanguard Mid Cap Index	6.06	10.94	20.70	15.48	-	0.13
Vanguard Strategic Equity Fund	5.57	10.70	18.55	16.42	11.77	0.35
Vanguard Small Cap Index Fund	5.51	9.21	18.25	14.70	-	0.13
Legg Mason Value Fund	6.74	5.31	18.01	14.00	11.53	0.69
Pennsylvania Mutual Fund	6.35	10.03	19.00	16.01	14.03	0.87
CREF Growth Account	7.35	8.62	18.33	8.24	3.02	0.48
T. Rowe Price Int. Growth & Income	6.17	10.40	28.93	19.43	-	0.91
CREF Global Equities Account	6.76	8.79	23.71	13.42	6.54	0.52
Vanguard Developed Markets	6.38	10.91	27.17	17.84	-	0.12