DCP Retirement Accounts – Why They Should Be Larger
UC faculty do not receive retirement credit for supplementary work paid out of grants or for summer school teaching. Medical school faculty likewise receive retirement credit for only a portion of their salary. Here is the background on this problem. The UC retirement plan is a Defined Benefit Plan (DBP). That means that at retirement, each faculty member will receive a defined monthly amount based on years of service (service credit), average of the highest three years of compensation (HAPC), and age at retirement (age factor). Employer and employee contributions each month have built up a substantial pool of funds for these monthly disbursements. Employee contributions are automatically deducted from pretax wages at roughly the rate of 2% to 4% less $19 a month for faculty with Social Security and 3% for those without.
Recently, the UCRP pool of funds has been large enough to meet payment obligations without receiving any employee or employer contributions. For good reason, UCRP management decided not to stop employee contributions but to continue the monthly deductions. The pretax amount deducted each month is defined according to the level of employee compensation, and thus is considered a Defined Contribution Plan (DCP). If employee contributions to the UCR pool of funds would be required again in the future, then it would be simple to stop the DCP contributions and resume the UCRP contributions without affecting the amount in the monthly paycheck. At retirement, the amount an employee withdraws is based on how the employee has invested these funds and not on a predetermined formula. The employee can direct DCP funds into any of the UC managed investment funds, such as Money Market, Equity, or Fidelity. If the employee does not specify, the monthly DCP employee contributions are invested in UC-managed Savings.
The current controversy is the level of employer and employee contributions to DCP accounts for summer teaching and funded summer research salaries. The University has come under pressure to include summer teaching salary and funded summer research in retirement compensation. So far, the administration has been reluctant to do so because those amounts may vary each year. The reason is that faculty could increase the highest three years of covered compensation by teaching summer school or working on funded summer research for three consecutive years near the end of employment. This would have a major impact on the actuarial levels required for the UCRP pool of funds to meet obligations.
Instead, the University is considering making a contribution to an employee’s DCP account. To get this employer contribution, the employee would be asked to make a matching contribution on the eligible amount for summer teaching salary or summer funded research. The university has suggested the rate of 7%, with 3.5% from the University and 3.5% from the faculty member. The Faculty Associations have argued for a higher level, 14%, corresponding to University contributions on covered compensation to the UCRP pool. Of this 14%, we believe the employer portion should be 10% and the employee 4%. Recently the Faculty Associations wrote a letter (please see below) to President Atkinson and circulated it widely throughout systemwide Senate committees to explain why the higher contribution level is more equitable.
Feb. 14, 2000
Dear President Atkinson:
I am writing to you on behalf of the Council of UC Faculty Associations, which are, by far, the largest independent, dues supported organizations representing the faculty at the campuses of the University of California. Our members have urged us– and we urge you– to support an important policy change in the University of California retirement plan. The Council would like to address the issue of level of employer and employee contributions to DCP accounts. We believe the University should make a comparable contribution to retirement for summer salaries and funded summer research as it does for regular gross earnings. The normal cost of the UCRP Defined Benefit Plan is currently about 14% of salary. Using this amount as the guideline, the employer should contribute 10% of summer teaching salaries or funded summer research to employee DCP accounts and the employee 4%. Moreover, we urge that this change in policy take place as soon as possible, preferably at the beginning of fiscal 2001.
The FA’s understand that there has been discussion of a 7% contribution level, to be divided between employer at 3.5% and employee at 3.5%, based on the current contribution rate used for DC Plan temporary and part-time employees. We believe that the proper contribution comparison is to full-time faculty. For example, at the Comparison 8 institutions that offer only a Defined Contribution Plan (DCP), Harvard, University of Michigan, and Stanford, all of them include summer school or summer research salary in their benefit formula. At Harvard, there are no employee contributions and the employer contributes 10% up to the Social Security wage base and 15% of salary over that level for faculty aged 40 or over. At Princeton, the employer contribution is 9.3% up to the SS wage base and 15% over on all salary paid by or through the University. The lowest level of employer contributions at Stanford is 5%, with escalating amounts up to 10% for increased employee contributions. At the University of Michigan, a large public university system much like UC, the employer contribution is 10% of eligible gross salary, which includes summer teaching and funded summer research.
The Faculty Associations believe that 10% would also be a fair level of contribution for the University of California, with the employee contributing 4% into the DCP accounts. Such a policy would bring the University of California in line with the policies at the Comparison 8 and with other major universities. It would preserve the same level of contribution for summer teaching salary and funded research as it does for the regular academic year. This policy would be welcome by faculty in all disciplines who regularly teach summer school or engage in funded summer research. Given the high level of competition for faculty in all fields, this change in policy would help make the University of California retirement benefits more attractive in faculty recruitment and retention.
Mary Ann Mason President, UC Faculty Associations
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