Eroding Retirement Contributions
For many faculty members, this year has been one of adjusting to the reality that their retirement nest egg is smaller than it used to be. Funds took hits of various sizes, depending on the level of risk participants accepted.
But for some faculty members, the hit may be compounded by reductions in the match that colleges are making each year to their funds. The American Association of University Professors’ study on faculty members’ economic status, being released today, shows that 13.4 percent of colleges reduced their contributions to retirement funds this year by at least 0.5 percentage points.
Another 11.6 percent of colleges increased their contributions by at least 0.5 percent, while the remaining 75.1 percent either made no change or enacted shifts of no more than 0.5 percentage points up or down. While that may sound like close to a wash, the AAUP data suggest otherwise. Most of the colleges that increased their contributions by more than 0.5 points did so by less than a percentage point. Most of those that made cuts of more than 0.5 points did so by 2 or more percentage points. At least 18 colleges and universities in the survey reduced their contributions to zero. (This does not count those institutions that never made contributions in the first place.)
As retirement experts attest, and the association’s report stresses, a seemingly small reduction in the size of a match can have a major, long-term impact on someone’s retirement savings.
John Curtis, director of research and public policy for the AAUP, said that the survey question on contributions referenced changes made over the entire last year. He said he believes that additional colleges made midyear cuts that may not be reflected in the data. Curtis noted that since contributions are based on salaries, and many of those were frozen this year, those who assumed that they would benefit from stable employee matches of a steadily growing salary may feel a double impact.
He also said it was important to highlight the retirement issue right now, since many faculty members are facing situations where administrations indicate that raises may be possible only with smaller retirement contributions, or that retirement contribution levels can be maintained only with smaller or no raises. While not agreeing that these tradeoffs are always presented fairly, Curtis said that professors need to pay attention to retirement issues. Younger faculty members in particular, he said, may not appreciate the impact of these choices on their economic well-being.
The reductions in institutional contributions were most notable at baccalaureate institutions, where more than 20 percent of institutions made reductions of at least 0.5 percent and 12.6 percent made reductions of 2 points or more.
Changes in Retirement Contributions, 2008-9 to 2009-10
|Decrease of 2 points or more||3.6%||4.2%||12.6%||3.1%||6.9%|
|Decrease of 1 to 1.99 points||3.6%||1.7%||3.0%||4.4%||2.9%|
|Decrease of 0.5 to .99 points||1.8%||2.8%||4.8%||5.0%||3.6%|
|Within +/- 0.5 points||80.0%||77.8%||71.5%||71.3%||75.1%|
|Increase of 0.5 to .99 points||6.8%||8.1%||4.8%||9.4%||6.9%|
|Increase of 1 point to 1.99 points||2.7%||2.8%||2.5%||6.9%||3.3%|
|Increase of 2 points or more||1.4%||2.8%||0.8%||0.0%||1.4%|
Paul J. Yakoboski, principal research fellow at the TIAA-CREF Institute, said that he understands why anyone seeing a reduced contribution would worry, but he stressed the other side of the equation: The vast majority of colleges -- even in challenging financial times -- did not reduce retirement contributions.
“This was the worst economic climate in a generation,” he noted. “I think a lot of observers would have expected more” in terms of retirement contribution cuts. “I think this signals the primacy and value that institutions saw in retirement plans.”
Yakoboski said that the best advice he could offer a participant at a college that has reduced its contribution would be to do a full review of the likely impact on long-term retirement goals. In some cases, he said, individuals may decide that they want to contribute more, to offset the lost funds from the employer, even in these tight economic times.
He acknowledged that “individuals’ budgets are tight right now, too,” but stressed that a financial adviser should explain the consequences of a long-term loss of contributions. (A survey last year by TIAA-CREF found that many faculty members are more worried now about retirement savings than they were before, but that they are not generally making major changes in savings strategies.)
Beth McHugh, vice president for market insights at Fidelity, said that the company has not seen notable contribution declines. But she said that, among smaller colleges, “this is the hot topic of discussion.” She said that colleges are asking about “creative plan designs” that might allow them save money. One option getting attention, McHugh said, was for colleges to replace across-the-board contributions with only matching contributions, so that limited funds go to those who are “actively participating.”
McHugh added that it was important to remember that colleges that have reduced contributions can resume their former levels.
About 8 percent of Fidelity’s corporate clients reduced contributions back in the wake of the stock market dive in 2008. As the economy has become more stable, with some seeing signs of recovery, she said that 40 percent of those companies have added back some or all of the contribution levels that they cut.
“The good news is that this is a trend that can reverse itself,” she said.