INTER FACULTY ORGANIZATION

2006 WORKSHOP MATERIALS

ON

RETIREMENT ISSUES

FOR

FACULTY NEARING RETIREMENT

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

What’s new for IRAP/Supplemental Retirement Program/Tax Sheltered Annuity Members in 2006?

Final Year Two-Step Increase

Early Separation Incentive

Notice of Intent to Retire Sample Letter

Severance Pay

Supplemental Retirement

Supplemental Retirement Plan Investments Performance

TIAA-CREF Takes Over Retirement Plan Administration

TRA Formula – Tier 1 (Level Benefits)

TRA Formula – Tier 2 (Rule of 90)

Optional Retirement Annuities

Effect of TRA/Post Fund Adjustments

Phased Retirement and the Annuitant Employment Program

Phased Retirement (Article 15)

Annuitant Employment Statute

Phased Retirement Sample Letter

Annuitant Employment Sample Letter

Post Retirement Health Care

2006 Monthly Rates State Employees Group Insurance

Retiree Health Care

HCSP Death Benefit Changes

MnSCU HRA COBRA Alternatives Chart

TRA Buy-Back

Voluntary Tax Sheltering

MNDCP Investment Options

Retirement Guide and Checklist

Important Numbers and Websites

HCSP Beneficiary Designation Form

What’s New for IRAP/Supplemental Retirement Program (SRP)/Tax Sheltered Annuity (TSA) Members in 2006?

New Plan Management

Wells Fargo was replaced by TIAA-CREF as the manager (recordkeeper) for the IRAP, SRP, and TSA programs.   A common set of investment funds was developed for all three plans.

A New Set of Investment Options

The mutual funds offered by Wells Fargo and the State Board of Investment (SBI) funds were dropped as investment options starting this year.   They were replaced by a line-up of ten TIAA-CREF funds, six Vanguard index funds, and seven “best in class” actively managed mutual funds.   Investments that were previously in TIAA-CREF accounts remained in the same accounts.   Investments that were previously in mutual funds offered by Wells Fargo or the SBI funds were moved (“mapped”) to the most similar type of fund in the new fund line-up.   If you do not want your money to stay in the fund it is now in, you can move your funds to one or more of the 23 funds offered, simply by making a phone call or going on line.

Much Lower Administrative Fees

The administrative fees charged to cover recordkeeping and management costs dropped from .25% of assets in the old WF and SBI funds, to a simple $20 per year per participant (regardless of the number of funds a person is invested in).   For example, if a participant had $100,000 invested in one or more of the mutual funds formerly offered WF, they were being charged $250/year in administrative fees; under the new plan, the fees would drop to a simple $20 per year.

New and Better Services

One of the new services offered under the new plan is one-on-one financial planning, where a counselor can analyze your personal financial situation and help you develop a financial plan.   This is a free service to IRAP and SRP participants.

In addition, the plan offers a broad array of web site tools, and a phone center staffed by people dedicated to the MnSCU Plan, you can now make same day/next day transfers between any of the TIAA-CREF, Vanguard, and mutual funds offered under the plan with a phone call or by going on line.

With all the new changes in the IPAP/SRP programs, this is an excellent time for you to develop a personal financial plan, review your current investments and update your beneficiary designations to make sure they are in line with you current life situation.

To establish your online account, review account balances, and if necessary, update your asset allocation, go to http://www.tiaa-cref.org/sredirect/myaccounts_login.html.  To update your beneficiary (ies) via a form or online through Secure Access, go to:  http://www.tiaa-cref.org/pdf/F1387.pdf.  To schedule an appointment in-person with an Individual Consultant http://www.tiaa-cref.org/moc.   You can also call the MnSCU/TIAA-CREF Retirement Service Center at 1-800-682-8969.

What is New for TRA Members in 2006?

Benefit Increase

The TRA annual service credit multiplier was increased from 1.7% to 1.9%, effective July 1, 2006, and only for future years of service.   For years of TRA service prior to July 1, 2006, the multiplier remains at 1.7% per year.

For TRA members who meet the Rule of 90 the annual service credit multiplier will be increased from 1.2% to 1.4% for each of the first ten years of service, and increased from 1.7% to 1.9% for years of service after ten years of service.   The increased multipliers only apply to years of service after July 1, 2006.

Contribution Increases

The employee contributions to TRA will each increase ½% of salary, starting July 1, 2006 (from 5% of salary to 5.5%).   Employer contributions will increase July 1, 2007.

Post-Retirement Adjustment will be 2.5%

The annual benefit increase for retirees will be 2.5% for the year starting January 1, 2007.    The annual increases for retirees are based on an inflation adjustment of up to 2.5% each year, plus an additional investment performance adjustment if returns exceed an 8.5% threshold.   However, the Post-Retirement Fund has a $4.7 billion deficit that needs to be paid off.   It is expected that post-retirement adjustments will not exceed the 2.5% inflation adjustment for a couple decades.

Cap on Post-Retirement Cost of Living Adjustments

Starting in 2010, there will be a cap of 5% per year on post-retirement cost of living adjustments.

Other Important Changes In 2006

·       The Tax Sheltered Annuity annual contribution maximums were raised to $15,000 per year and the maximum contributions for persons 50 and older increased to $20,000.

·       The Deferred Compensation annual contribution maximums were raised to $15,000 per year and the maximum contributions for persons 50 and older increased to $20,000.

·       The ongoing annual employer contribution to the Health Reimbursement Arrangement (HRA) was increased from $500 per year to $600.

·       The career steps in the IFO/MnSCU contract expire on June 30, 2007.   Career steps already received remain in effect, but no new career steps will be granted unless the contract is changed.

·       Medicare Part D took effect, lowering retiree health care premiums under the State Health Plan for persons over 65 by about $116 per month.

·       TRA buy-back for military service ended May 16, 2006.  No buy-back options now exist.

·       The post-retirement Health Care Savings Plan (HCSP) now offers a tax-free life insurance benefit instead of a taxable payout of the account balance for persons who die without a spouse or eligible dependent. 

Final Year Two-Step increase

Article 11, Section C, of the proposed 2005-2007 IFO/MnSCU Agreement reads:

Section C.  Faculty Who Provide Early Notice of Retirement.  Faculty members who elect to retire with at least fifteen (15) years of service in the Minnesota State Universities and who are at least age fifty-five (55) shall have his/her salary placement increased by two additional steps on the salary schedule(s) established in this Agreement in the final two semesters of employment. To receive this benefit the affected faculty member must submit a written letter of retirement by October 1 if retirement will occur no earlier than the end of the following spring semester and no later than the day prior to the beginning of the subsequent fall semester or by January 15 if retirement will occur at the end of the subsequent fall semester.  Faculty who cannot receive the early notification of retirement steps provided for in this Section because they are at step 49 of the salary schedule shall receive a one-time payment of $4,800 (pro-rated by FTE) in lieu of the step increase provided for in this Section.

Important Points:

• The notice date for retirement effective prior to the next fall semester is October 1.  If you wish to leave at the end of fall semester, you must give your notice by the previous January 15, to be eligible for this special two-step salary increase.
• The two-step increase is in addition to other steps and across-the-board increases you would otherwise be eligible for during the year.  The increase amounts to a 4.85% increase in base salary for the final year of employment.
• Since both severance pay and the early separation incentive are based on the final year of employment, the two additional steps also result in a 4.85% increase in these benefits.   However, the $4800 one-time payment to faculty at step 49 will not count in base salary for computing severance and the early separation incentive.
• The two additional steps (or the $4800 payment for faculty at step 48) will not be counted in your salary for purposes of computing your “high-5 average salary” for TRA pension benefits.
• The two-step increase is paid throughout the final year of employment.

Early Separation Incentive

Article 16, Section D of the proposed 2005-2007 IFO/MnSCU Agreement reads:

Section D. Separation Incentive.

Subd. 1.  Eligibility   In addition to the above a faculty member who has served at least fifteen (15) years in the Minnesota State Universities and is at least fifty-five (55) years of age shall be eligible for early separation.

Subd. 2.  Sunset.  Faculty members hired after June 30, 1996 shall not be eligible for this early separation incentive.

Subd. 3.  Individual Eligibility. 

a. An eligible faculty member who elects early separation through resignation or early retirement by October 1, to be effective the beginning of the subsequent academic year, or a date mutually agreed upon by the faculty member and the Administration, except those faculty qualifying under paragraph b. below, shall receive compensation equal to his/her base salary minus ten percent (10%) of his/her base salary for each year beyond age fifty-five (55). The faculty member shall receive the compensation in two (2) equal annual payments, the first at the beginning of the ensuing fiscal year and the second in the following fiscal year. If the separation payment is less than ten thousand dollars ($10,000), it will be paid to the faculty member in a lump sum.  In no circumstance shall a faculty member eligible for an early separation payment receive such payment in any one fiscal year which would result in compensation in excess of one hundred percent (100%) of total salary, exclusive of overload and summer sessions.  In the event a faculty member who is otherwise eligible for the separation incentive described in this Section, and has provided the advanced notice of his/her intention to retire as provided in this Section, dies before his/her separation date, the incentive payment shall be made to his/her estate.

b.         If a faculty member is older than age fifty-five (55) when s/he completes the fifteen (15) years of service requirement, the faculty member shall receive the full benefit of one year’s base salary if s/he: 1) applies within one hundred and eighty (180) days of meeting the age and service requirement, and 2) the separation will occur no later than one hundred and eighty-one (181) days following the date of application for the benefit. Any faculty member eligible under this subdivision who does not elect early retirement during this window but chooses to apply later will be compensated under the schedule set forth in paragraph a.

Subd. 4.  Institutional Designation.  After meeting and conferring with the Association, the President may designate departments or programs in which faculty members choosing the incentive shall receive compensation equal to their full base salary.  The President’s designation will be based on reasons that are in the best interest of the university.  Payments will be made in a manner consistent with Subdivision 3.

Subd. 5.  Maintenance of Benefits   The separated faculty member shall have an amount equivalent to the employer contribution for one year’s health insurance premiums deposited in his/her postretirement health care expense account at the time of separation.

Subd. 6.  Persons choosing early separation shall have eligibility for early retirement payments determined in accordance with appropriate statutes and regulations. 

Important Points:

• You must notify your employer by October 1^st for retirement effective the beginning of the following fall semester.  If you retire at the end of fall semester, it has been MnSCU's practice to require notification by the previous January 15^th in order to qualify for the incentive.  You can give your notice for the separation incentive in the same letter as the notice for the final year two-step increase (see form letter that follows).
• The contract provides that the separation incentive is paid out in two equal installments, the first half in the first paycheck in July following retirement and the second half one year later. 
• You may be able to tax shelter the first installment of your separation incentive, depending on how much you have already contributed to tax sheltered annuities for the current and past years.  If you are interested in doing this, contract your HR Office or call Lisa Stitzel at TIAA-CREF 1-800-682-8969. 
• It is possible to tax shelter an additional amount through the State Deferred Compensation program.  The State Deferred Compensation program does not have the pre-age 59½ withdrawal penalty that applies in the case of TSAs.  Contact your HR department or the State Deferred Compensation program for details call David Ochs at 612-284-7875, 1-877-457-MINN or 612-247-6597.
• It takes time to set this up properly, so start soon.
• Under the current contract, the employer will contribute a year’s worth of health insurance coverage in cash to the postretirement health care savings plan.   This amount ($4,867 if you have individual coverage, and $14,314 if you have dependent coverage, can be used to purchase health care through the state health plan or elsewhere, or if it is not needed for immediate health insurance costs (for instance, if a faculty member already has health coverage through a spouse or with a new employer) the money can be used for other immediate health related expenses (dental, eyewear, long-term care premiums) or saved to pay for health related expenses later in retirement (Medicare Part-B and Medicare supplement premiums).
• Persons who reach 15 years of service after they reach age 55 can retire within 181 days of reaching eligibility, and receive a full year of salary, unreduced for age.

Sample Notice of Intent to Retire
Early Separation Incentive and the Final Year Two-Step Increase

Date

President
University
Address 

Dear President: 

I am hereby giving notice, pursuant to Article 11 and Article 16 of the IFO/MnSCU Agreement, of my intent to retire on (date).

My decision to retire is based on the understanding that I am entitled to the final year increase of two additional steps for early notice of retirement, as provided in Article 11, and the early separation incentive, as provided in Article 16 of the IFO/MnSCU Agreement.  If for any reason I am ineligible for the benefits referred to above, I reserve the right to rescind this notice prior to my retirement, returning any separation benefits I received, and to continue my employment.

Sincerely,

(Your Name)

Severance Pay

Any faculty member who has at least 10 years of service, and whose age and years of service equal or exceed 68 shall receive severance pay.

Severance pay is based on accumulated unused sick leave to a maximum of 125 days.  Faculty members with less than 25 years of service receive 40 percent of unused sick leave, or a maximum severance payment equivalent to 50 days of pay (125 x 40% = 50).  Faculty with 25 years or more of service receive 45 percent of unused sick leave, plus an additional one percent for each year of service beyond 25 years. No one can receive more than 50 percent (62.5 days) of unused sick leave.

                                                % Unused Sick Leave             Maximum # of
Years of Service                    (125 max recognized)           Days of Severance

Less than 25                                    40%                                           50

        25                                            45%                                           56.25

        26                                            46%                                           57.5

        27                                            47%                                           58.75

        28                                            48%                                           60

        29                                            49%                                           61.25

30 or more                                      50%                                           62.5

The daily rate of pay is determined by dividing your 9-month base salary for the final year by 168.

Calculation Example:

For a faculty member with 30 years of service, the maximum accumulated unused sick leave of 125 days, and a salary at the time of separation of $97,715:

·        $97,715 (salary)/168 (duty days) = $581.64 (daily rate of pay)

·        125 (maximum accumulated sick days) x 50% = 62.5 (days of severance pay)

·        62.5 (days of severance pay) x $581.64 (daily rate of pay) = $36,352 (severance pay).

 Important Points:

·        Since the final year two-step increase raises the final year salary by 4.85 percent, it also raises the severance payment by 4.85 percent.  

·        Severance pay is paid into the Post Retirement Health Care Savings Plan the first paycheck after retirement.  It will not be taxed.

·        The $4800 one time payment to faculty at step 49 will not be counted in salary for computing severance pay.

SUPPLEMENTAL RETIREMENT

Upon retirement, a faculty member has many options regarding Supplemental Retirement.  The following is a list of options taken from the TIAA-CREF website (the administrative agenda for the Supplemental Retirement Plan) and modified for this workshop:

When it’s time to choose how to take income from your Supplemental Retirement Plan (SRP), you have a variety of options:

Interest Only – You can receive the current interest earned on your TIAA Traditional Account in monthly payments.  Your principal remains intact while you receive the interest. (Note:  These payments are generally available to individuals between the ages of 55 and 69 ½.)

Lifetime Retirement Income

One-life annuity – provides income for as long as you life.

Two-life annuity – provides lifetime income for you and an annuity partner (your spouse or someone else you name) for as long as either of you live.

One- or two-life annuity with guaranteed period – guarantees income for up to 20 years, as long as the period you choose does not exceed your life expectancy.  It ensures that income continues to go to your beneficiaries if you (one-life annuity) or both you and your annuity partners (two-life annuity) die before the end of the guaranteed period.

Lump Sum – You can withdraw all or part of your account in a single cash payment, depending on your plan rules.

Minimum Distribution Option – Generally, you must begin taking minimum withdrawals from your account by April 1 following the year in which you turn age 70 ½ or retire, whichever is later.  This can help you defer the most taxes on your assets while keeping you in compliance with federal regulations.

Retirement Transition Benefit – You can withdraw, in cash, up to 10% of your accumulation that has been converted to lifetime annuity income.  The amount you withdraw will reduce your lifetime annuity income accordingly.

Single-Sum Death Benefit – A set amount your beneficiary(ies) will receive from your retirement account if you die before taking income.

Small-Sum Distribution – Upon separation from service, you can withdraw your entire retirement savings if your TIAA Traditional Account value does not exceed $2,000 and your overall account balance is below a limit set by your employer’s plan (typically $4,000).

Systematic Withdrawals – You can choose to receive regular income payments (minimum $100) on a semi-monthly, monthly, quarterly, semi-annual or annual basis.  You can increase, decrease or suspend the payments at any time.  (Note: These withdrawals are not available from TIAA Traditional Account balances.)

Your supplemental Retirement Plan (SRP) is designed to provide you with income throughout your retirement.  Leaving money in your account may allow the funds to grow on a tax-deferred basis.

How do I set up a Distribution from my Account?

Contact the TIAA-CREF/MnSCU Retirement Center, phone 800-682-8969 between 8:00 a.m. and 5 p.m. M-F.  A team of MnSCU-specific counselors can assist you.  You can also request a one-on-one meeting to discuss all aspects of your personal retirement situation.

SUPPLEMENTAL RETIREMENT PLAN (SRP)

RETIREMENT PLAN INVESTMENTS PERFORMANCE

As of 6/30/2006

The information above on investment fund performance is taken from the TIAA-CREF web page (http://enroll.tiaa-cref.org/planperformance.aspx?planId=993).  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.

TIAA-CREF Takes Over Retirement Plan Administration

This summer, TIAA-CREF replaced Wells Fargo as manager of the MnSCU Individual Retirement Account Plan/Supplemental Retirement Plan (IRAP/SRP) and Tax-Sheltered Annuity Plan (TSA).

This change brought much lower administrative fees to participants, as well as both enhancements and simplification to the retirement plans:

• A single point of contact (800-682-8969, 8 a.m. – 5 p.m. CT), and a dedicated web page ( www.tiaa-cref.org/mnscu ) for your IRAP/SRP and TSA plan accounts
• New investment choices from TIAA-CREF and other mutual fund providers – all through one source (this will allow same day /next day movement of investments from fund to fund)
• One quarterly statement consolidating the activity in your IRAP/SRP and TSA plan accounts
• Objective advice and one-on-one financial planning services.

NEW INVESTMENT CHOICES

The IRAP/SRP and TSA plans will feature many new investment choices. You will be able to choose from 10 TIAA-CREF annuity accounts and a selection of 13 mutual funds from different providers: