REDUCE, REBALANCE, REQUIRE – "The 3 Rs"
April 14, 2010
As the Sustaining New Synergies (SNS) Task Force evaluates University processes and develops implementation plans, frequently asked questions will be answered to help keep the campus community informed. As the SNS initiatives evolve, questions and answers will be added or modified. Updates will be highlighted in yellow.
Q. What does Reduce, Rebalance, Require – “the 3 Rs” – mean?
A. Reduce, Rebalance, Require – “the 3 Rs” – refers to changes to Purdue’s defined contribution (DC) retirement plan that were adopted by the Board of Trustees on April 9, 2010.
Q. How will the 3 Rs work?
A. The 3 Rs will apply only to faculty and staff covered by the defined contribution retirement plan – currently administered by TIAA-CREF. It includes these major components:
1. Reduce: Purdue will reduce its retirement contribution to 10 percent of the employee’s budgeted pay, plus summer pay for academic year faculty.
2. Require: Employees will contribute a mandatory 4 percent of pay to retirement savings, which will be deducted automatically from employee paychecks. The mandatory contribution will go into a new 401(a) retirement savings account.
3. Rebalance: In conjunction with this change, the University will be increasing the employee’s salary to offset the mandatory employee retirement contribution. Because Purdue currently has a split contribution rate, paying 11 percent on the first $9,000 of salary and 15 percent on salary over $9,000, the level of salary adjustment will vary, but will be no less than the 4 percent needed for the employee’s mandatory retirement savings contribution.
More information and a calculator will be available soon to help employees see the personal impact of the change.
Q. When will the retirement changes go into effect?
A. January 2011
Q. How will I receive my 3 Rs pay adjustment?
A. You will receive a recurring increase to your budgeted pay when the new plan goes into effect in January 2011.
Q. Will the new mandatory employee contribution to the retirement plan be subject to income tax?
A. The increase in pay will be subject to FICA (Federal Insurance Contributions Act) tax, which is the federal payroll tax for Social Security benefits. For 2010, the OASDI portion of FICA (6.2 percent tax) applies to the first $106,800 of an individual’s pay. OASDI is Social Security’s Old-Age, Survivors, and Disability Insurance program. The Medicare portion of FICA (1.45 percent tax) applies to all wages. No federal, state, or county taxes will apply.
Q. Do employees need to complete any new forms or make any elections in regard to the new mandatory contribution?
A. As in the current program, employees will be able to choose how to invest the funds; however, those details are still being worked out. Watch for more information this summer.
Q. Currently, the University contributes 11 percent on the employee’s first $9,000 of salary and 15 percent on salary above $9,000. Will this two-tier contribution level remain in effect?
A. No. Under the new structure, the University will contribute a 10 percent benefit on the employee’s budgeted salary, and the employee will make a mandatory contribution of 4 percent on all budgeted salary.
Q. I’m already contributing at least 4 percent to retirement through my TDA (tax deferred annuity). Does that cover my mandatory employee contribution to retirement?
A. No. The mandatory contribution is separate from your voluntary retirement savings through a 403(b) or 457(b) account. The value of saving voluntarily through a TDA is not changed by this new retirement program structure. Voluntary savings will still be an important part of helping you reach your overall retirement income goals.
Q. I’m currently contributing the maximum amount to my 403(b) and 457(b) TDAs. Where will this additional mandatory 4 percent contribution go?
A. The mandatory employee contributions will go into a 401(a) defined contribution plan account. This is an entirely different account than those offered for voluntary retirement savings, so it does not affect your limits under the 403(b) and 457(b) plans.
For more information about Purdue’s voluntary retirement savings plans, see the Staff Benefits Web site or call Staff Benefits Customer Service at 49-42222.
Q. In the SNS forums, employee retirement contributions were described as voluntary, giving the employee the choice to use rebalanced funds as additional take-home pay. Why is the University now requiring employees to contribute to the retirement plan?
A. While the new structure doesn’t allow the flexibility that was initially discussed, it accommodates other important elements that would have been compromised under the earlier approach. One such element is ensuring that overall retirement savings remain at an appropriate level to fund the employee’s retirement years adequately. Another is providing a new 401(a) tax-deferred savings vehicle into which all mandatory 4 percent contributions will be deposited. As a result, employees who are already contributing the maximum amounts to their voluntary 403(b) and 457(b) accounts aren’t forced to use an after-tax account for the new mandatory 4 percent contribution.
Q. Is a mandatory employee contribution to retirement legal?
A. A mandatory employee contribution complies with Internal Revenue Service (IRS) regulations and is a part of many retirement plans. About 75 percent of universities included in the recent Hewitt total compensation study require employees to contribute to the retirement plan to receive the full university contribution. The employee contribution at these universities averages about 5.7 percent of pay.
Q. Does the mandatory employee contribution apply to faculty and staff at the regional campuses?
Q. How will the 3 Rs affect summer pay for academic-year appointed faculty and staff?
A. Both the University’s 10 percent contribution and the employee’s 4 percent mandatory contribution will apply to summer pay, just as they do to budgeted pay.
Q. How will the 3 Rs affect employees hired between now and January 2011?
A. They will hire in under the current benefit structure and change to the mandatory contribution plan with everyone else in January 2011. Positions currently requiring a three-year waiting period for participation will continue to have a three-year waiting period under the new structure.
Q. How will the 3 Rs affect employees who are currently in the three-year waiting period for participation?
A. As these employees reach the end of their three-year waiting period, their pay will be adjusted, and the mandatory 4 percent employee contribution will begin when the University’s 10 percent contribution starts.
Q. What advantages does the 3 Rs approach provide?
A. The Board of Trustees believes rebalancing is a key factor in repositioning Purdue for future competitiveness by putting Purdue’s pay and benefits more in line with our peer institutions.
The 3 Rs approach to rebalancing meets the Board’s objective while keeping overall combined retirement saving at a more appropriate level for funding the employee’s future retirement years. In addition, the required 4 percent employee contribution does not count toward voluntary retirement savings contribution limits, so employees who are at the maximum voluntary contribution will not be adversely affected.
Q. Have decisions been made about other benefit-related options?
A. No. Discussions are continuing about the medical plans, benefits for part-time employees, and other topics. These items are expected to be addressed at the May Board of Trustees meeting.