FOR COMMENT

To the University Community:

The recommendations for change in retirement benefits are published in Almanac so that all Penn faculty and staff will be aware of the proposed change and the rationale for the recommendations. It also provides an opportunity for the University community to give us feedback via e-mail at askhr@hr.upenn.edu or by campus mail respectively at 208 College Hall/6303 or 3401 Walnut Street, Suite 538A/6228. The comment period ends January 21, 2000.

We anticipate the President, Provost and Executive Vice President will make a final decision after the comment period, with implementation effective July 1, 2000.

--Barbara J. Lowery, Associate Provost
--John J. Heuer, Vice President for Human Resources

Proposed Retirement Plan Changes

Background

The University of Pennsylvania offers retirement benefits to help provide needed income to employees when they retire. The current retirement plans were designed over time to meet the personal and professional needs of our employees, and eligibility for the plans has been based on employment status. In general, eligible faculty and monthly-paid staff have participated in a "defined contribution," tax-deferred annuity plan (TDA). Weekly-paid staff have been covered by a different, "defined benefit" retirement allowance plan (RAP). Both plans are described in more detail below.

Over the past several years many weekly-paid staff have asked to be included in the TDA because vesting in it is immediate and because its benefits are perceived to be greater than the RAP's benefits. At the request of the Personnel Benefits Committee of University Council, the Division of Human Resources has reviewed this issue at length, and we are now very pleased to recommend to the President, the Provost and the Executive Vice President that this request be approved.

Specifically, we are recommending that all full-time, weekly-paid staff be given the option of joining the TDA. This option may significantly enhance the value of the benefits these staff receive for working at the University, and it will help us continue to provide Penn faculty and staff with a strong, competitive benefits package.

This change will also be consistent with current best practices in benefits design and IRS tax regulations.

Features of Current Retirement Plans

The University of Pennsylvania currently has three retirement plans:

Basic Tax-Deferred Annuity Plan (TDA) --This is a defined contribution plan that covers full-time monthly paid staff and eligible faculty. In this plan, the University provides the employee with an annual retirement benefit equal to a percent of salary based on age, as long as the employee contributes a specified amount. University contributions are available after the employee completes 1 year of service. Participants choose their own investments, bear the investment risk, and receive the accumulated balance. Vesting is immediate.
Retirement Allowance Plan (RAP) --This is a defined benefit plan that covers weekly-paid staff. At retirement, the employee receives a guaranteed percent of salary based on years of service. Participants do not contribute to this plan. The University bears the investment risk that sufficient funds will be available in the plan when required. Vesting occurs after the participant completes at least 1000 hours of service per year for 5 years.
Supplemental Tax-Deferred Annuity (TDA) Plan --This is a defined contribution plan that covers part-time and full-time staff and faculty. This plan is funded solely by employee contributions that are not matched by the University. In this plan, participants choose their own investments, bear the investment risk, and receive the accumulated balance. Vesting is immediate.

Issues

A number of employees in the RAP have contended that it does not provide as much of a benefit as that provided by the TDA. For example, the RAP does not provide immediate vesting, portability and the right for employees to make their own investment decisions.

However, other employees believe the RAP will provide them with a greater benefit than the TDA. The RAP does not require a contribution from employees, while the TDA requires direct financial contributions from participating employees. Some RAP participants, for this reason, may want to continue their participation in the RAP.

A third issue involves federal tax regulations governing retirement plans. Under IRS regulations, retirement plans may not discriminate in favor of highly compensated employees, defined as employees earning more than $85,000 as of the year 2000. The University's retirement plans have passed relevant tests each of the past several years, but there is no assurance that the TDA and the RAP, as currently structured, will continue to pass in the future. Failure to pass the non-discrimination testing would seriously jeopardize the tax status of the TDA and could lead to the taxation of all prior pre-tax contributions into the Plan.

Recommendations

The Office of the Provost and the Division of Human Resources make the following recommendations:

1. Redesign the retirement benefits as follows:

Create a comprehensive Tax-Deferred Retirement Plan available to all employees who meet the requirements for participation.
Provide employees with a basic age-based contribution from the University, which does not require a matching employee contribution. This contribution would begin after 1 year of service at the University.
In addition to the basic University contribution, provide a dollar-for-dollar University match for all employee contributions up to 5% of salary. Employees may begin to contribute immediately, and the matching contributions would begin after 1 year of service, as is currently provided in the TDA.
Continue to permit additional employee contributions up to the employee's maximum allowable contribution amount under federal law and regulations. Employees may begin these supplemental contributions immediately.
Continue to provide immediate vesting for all contributions.

Recommended Changes in TDA for All Full-Time Employees

Employee Contribution Requirements University Basic Non-Matching Contribution University Matching Contribution Total Potential University Contribution

Current Plan

Up to Age 30 -4% None 6% 6%

Ages 30-39 -5% None 8% 8%

Ages 40 & Over -5% None 9% 9%

Recommended

A. No Contribution Required

Up to Age 30 1% None

Ages 30-39 3% None

Ages 40 & Over 4% None

B. With Employee Contribution Up to 5% Dollar for Dollar Match

Up to Age 30 1% on Employee 6%

Ages 30-39 3% Contributions 8%

Ages 40 & Over 4% Up to 5% 9%

Supplemental Retirement Annuity to be retained as is.

Vesting will continue to be immediate for all employees.

2. Give all current RAP participants a one-time irrevocable opportunity to move into the new Tax-Deferred Retirement Plan. No vested benefits will be lost to any individuals currently in the RAP. Current RAP participants who do not elect to join the new plan will continue to be covered by the RAP without any change in their benefits.

3. Discontinue the availability of the RAP to new employees effective July 1, 2000. All future employees meeting the participation requirements will be eligible for the new Tax-Deferred Retirement Plan.

Next Steps

Following the comment period, the President, Provost, and Executive Vice President will decide whether or not to accept these recommendations.
If the recommendations are accepted, the University will then institute an educational campaign designed to provide employees with in-depth retirement information (including group and individual counseling sessions).
For employees currently in the RAP, the most advantageous retirement plan will depend on individual circumstances. A person's age and salary must be factored into the decision along with his or her tolerance for risk and other financial circumstances. For some employees, the RAP may provide retirement coverage that is superior to what may be achieved in theTax-Deferred Retirement Plan. For others, there will be advantages to changing plans.
Those employees currently eligible for but not participating in the TDA will begin receiving basic University contributions under the new plan. They will need to make investment decisions for these contributions, and may want to take this opportunity to participate more fully in the plan. Individuals already in the TDA should find the changes relatively seamless.
Individuals already in the TDA will be eligible to receive the same overall contribution level, but may see some administrative changes.

Summary

The recommended plan is superior to the current plans in several ways:

It provides basic retirement benefits for all eligible employees regardless of whether or not they make financial contributions to it.
It brings retirement benefits for weekly-paid staff into alignment with those of faculty and monthly-paid staff.
Despite important basic changes, it maintains the same overall level of retirement benefits that currently exists in the TDA. Under the proposed new plan, the basic University contribution taken together with the full dollar-for-dollar match on up to 5% of salary offers the same level of benefits provided under the current TDA.
It gives employees greater flexibility in choosing their contribution levels, since they no longer need to contribute a minimum amount in order to receive University matching contributions.

We believe that these proposed changes, along with the other benefits provided by the University, will continue to provide Penn employees with a strong, competitive benefits package.

Almanac, Vol. 46, No. 14, December 7, 1999

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