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New UNC Faculty? Don’t Choose The Wrong Mandatory Retirement Plan (TSERS vs. ORP)

| June 01, 2018
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If you are a new faculty member at UNC, one of the single most important decisions you’ll need to make is choosing between the Teachers & State Employees Retirement System (TSERS) or the Optional Retirement Plan (ORP) for your Mandatory Retirement Plan.

You only have within 60 days of your hire date to make this one-time, irrevocable decision, so keep the following points in mind to make sure you choose the best plan for your particular circumstances.

While there are many similarities between the two plans, below are some of the more important differences. (These mandatory plans are distinct from the voluntary UNC Supplemental Plans such as the 403b, 457, and 401k, which I’ll cover in a future article.)

Defined Benefit vs. Defined Contribution

The TSERS Plan is a defined benefit plan. In a defined benefit plan like TSERS, your retirement benefit is determined by a formula that takes into account your years of service times your highest average consecutive 4 years of salary times a retirement factor of 1.82%.

The ORP, on the other hand, is a defined contribution plan. In a defined contribution plan, your retirement benefit is determined by the amount you and you employer contribute into the plan and the investment rate of return that those contributions earn while in the plan.

Age/Expected Length Time At UNC

In general, if you are younger, with more years to take advantage of compounding interest and potential investment gains, then the ORP may be more advantageous. If you are older, say 45 years plus, with fewer years before retirement, then TSERS may provide a larger retirement benefit.

Similarly, if you think you will only be at UNC for a few years and expect to move on to other institutions and would rather have a retirement plan that is “portable”, then the ORP will probably be a better choice. (Keep in mind that in order to be vested in either plan you have to be participating in the plan for 5 years, so try make sure to have 5 years at UNC before moving on to a new institution.)

Investment Control and Investment Risk

In a defined benefit plan like TSERS, you do not have the responsibility of deciding how to invest your and your employer’s contributions. The TSERS plan chooses how to invest the funds and as such bears all of the investment risk.

In a defined contribution plan like the ORP, you (or a registered investment advisor that you hire… see page 9 of the UNC Retirement Programs Guide are responsible for choosing the investments and, as such, you bear the investment risk yourself.

So, if you’d like the ability to pick and monitor your own investments and don’t mind bearing the investment risk, then the ORP might be a good choice for you. If you want nothing to do with the investment selection and don’t want to bear the investment risk yourself, the TSERS might be a better fit. If you are somewhere in between (i.e. you don’t want to pick the investments yourself but would like the opportunity of possibly getting higher returns than those implied in the TSERS benefit formula) then choosing the ORP and hiring a registered investment advisor to handle the portfolio management might be best for your situation.

TSERS’ Anti-Pension-Spiking Measures

Starting January 2015, a new Contribution-Based Benefit Cap was put in place in the TSERS plan, for those retiring after January 1, 2015 with an Average Highest Four Years Salary greater than $100,000, to prevent “pension-spiking”.

An example of “pension-spiking” would be, a TSERS faculty member is at one UNC institution making $160,000, broken up into a $140,000 base salary + a $20,000 annual bonus. Only the $140,000 base salary goes towards his TSERS average highest compensation figure. He/she then makes a lateral move to another UNC institution for the same overall compensation of $160,000, but he/she negotiates to have it coded as $160,000 base salary +$0 annual bonus. This will greatly increase his/her Average Highest Four Years Salary and his/her ultimate TSERS retirement benefit even though it’s the same overall compensation.

With the new Contribution-Based Benefit Cap, for those hired after January 1, 2015, whose Average Highest Four Years Salary is greater than $100,000, your institution has the choice to pay you the increased benefit or not. If it refuses to pay the increased benefit amount, you can then choose to pay for the increased benefit amount yourself or just accept your normal benefit amount. (For those hired before January 1, 2015, whose Average Highest Four Years Salary is greater than $100,000, your institution is on the hook for the increased benefit amount).

While this new cap is intended to stop those trying to game the system, unfortunately, it could also hamper those who earn legitimate career success and corresponding higher compensation.

You can contact your HR Benefits Department to see if your compensation is subject to the cap or not. You can also review the UNC TSERS Handbook for more info.

TSERS State Pension Financial Health

While choosing the TSERS plan relieves you of bearing the investment risk yourself, that doesn’t mean it is risk free. One of the risks of any pension plan is the financial health of the plan itself.

The ability of a state pension plan to honor and pay its retirement benefit obligations are dependent upon a number of factors such as how well the pension investment managers manage the plan assets and liabilities.

Luckily, the NC TSERS plan is one of the best-funded state pension plans in the nation, but that doesn’t guarantee that politicians and money managers will continue to make sound decisions throughout the remainder of your career, let alone throughout the 20-30 years of your retirement! (What could go wrong?! Just ask the State of Illinois about their pension crisis.)

While it’s comforting to know that in the NC TSERS Handbook it states, “these funds are protected by the Constitution of North Carolina from being used for any purpose other than retirement system benefits and expenses“, it also states on page 37 that “because future conditions are unforeseeable, the North Carolina General Assembly reserves the right to modify the provisions of the System”. In other words, “IT’S GUARANTEED… UNTIL IT ISN’T”.

Now, this isn’t a deal breaker, but just one of the many things to keep in mind.

Which One Is Right For You?

The TSERS plan will probably be more preferable to those who start in the UNC system at a later age, who plan to stay in the UNC system for a longer time, who do not want to choose their investments or bear the investment risk themselves, or who’d rather have the retirement benefit based on their salary and years of service.

The ORP plan will probably be more preferable to those who start in the UNC system at a younger age, who do not plan on staying in the UNC system for a longer time and would rather a “portable” retirement plan, who want to choose their investments themselves or with the help of an investment advisor, and who want their retirement benefit based the performance of those investments.

Make the Right Choice

It isn’t easy to determine which plan will be most advantageous to you. Take your time in doing your homework and weighing the pros and cons… But not too much time, because you only have within 60 days of your hire date to choose a plan, otherwise you will be defaulted into the TSERS plan.

TIAA-CREF has a basic Retirement Plan Comparison Calculator that is a decent place to start crunching the numbers on which plan may be best for you. After that, you really should compare a few “What-If” scenarios in each plan to see which will suit you best.

Here are some useful NC TSERS and ORP documents to help you along:

UNC Retirement Programs Guide

UNC Mandatory Retirement Plan Decision Guide

UNC ORP Plan Document

UNC TSERS – Handbook

You can also click the Resources tab above for more helpful information.

Feel free to contact me with any questions or comments.


* This article was originally published 02/01/2016 and was revised 06/01/18.

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