| To submit a question: BenefitsQA@whoi.edu |
Updated January 28, 2005 |
Questions
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 So many times in meetings we've been told that the Institution has not contributed [because they were not allowed to] anything to our retirement program for more than 10 years. When we look at 'Total compensation' figures [online ibenecom] however, the WHOI cost for our 'Retirement Plan' is a significant figure. Can you explain?
- How do the short-term strategy and long-term strategy fit together? How will benefits be determined?
- Regarding the Plan’s lump sum option: a) How is it calculated? b) Is the lump sum provision responsible for the Plan’s funding status? c) Can it be taken away? d) Is there a way to protect the lump sum from income taxes?
- What is the Special Early Retirement Benefit (SERB) and how do you qualify for it?
- I am considering retiring on December 31, 2005. How do I get an estimate of my retirement benefit?
- Regarding the minimum cash balance benefit: a) What interest rate is credited to my account? b) Will my minimum cash balance benefit continue to grow after December 31, 2005? c) How does the annuity payment option work?
- How will inflation impact benefits earned prior to 2006?
- Is the short- and long-term strategies work about maintaining a competitive program so that WHOI can continue to attract and retain quality staff or is it about reducing costs?
- What are the rules concerning WHOI’s ability to change the Plan?
- What are the administrative expenses of the WHOI retirement plan?
- What is the Defense Contract Audit Agency’s (DCAA’s) role in setting the pension cost component of the fringe benefit rate? What is the history of our fringe rate (including the portion attributable to pension)?
| Short-Term Cost Mitigation Strategy |
- How are benefits being affected in the short-term?
- Why 4.5%?
- How is Final Average Compensation (FAC) determined for individuals who are not eligible employees and Plan members (or former Plan members) on December 31, 2004?
- Is the short-term solution really temporary?
- Is the lump sum option going away?
Long-Term Cost Mitigation Strategy |
- Has the long-term solution already been determined?
- Is the lump sum option going away?
- What types of long-term solutions will the Task Force consider?
- Who will participate on the expanded Task Force?
- How do I request an estimate of my retirement benefit?
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| Benefits Q&A Responses |
1. So many times in meetings we've been told that the Institution has not contributed [because they were not allowed to] anything to our retirement program for more than 10 years. When we look at 'Total compensation' figures [online ibenecom] however, the WHOI cost for our 'Retirement Plan' is a significant figure. Can you explain?\
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Your question touches upon two topics; “Cost” and “Funding” of the plan. Each year our plan does have a cost and the funding status is how much if any WHOI needs to contribute to the plan to maintain satisfactory funding.
The cost of the Plan reflects the value of benefits earned during a year, as determined by the Plan’s actuaries.
Contributions to the plan depend upon the plan’s funded status. Over the past 10 years, the plan has enjoyed an over-funded status. Under IRS and DCAA rules, the plan’s over-funding must be applied toward the cost of the plan before any additional contributions can be made. Therefore, we have had no contributions since 1992 due to positive performance of investment earnings and assets that exceeded the cost for each year since 1992.
As was mentioned in the employee meetings, the DCAA would not compensate WHOI for any contributions to the plan in years in which no contributions were determined to be required by the Plan’s actuaries.
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| 2. How do the short-term strategy and long-term strategy fit together? How will benefits be determined? |
The short-term strategy will be replaced by the program designed under the long-term strategy, beginning on January 1, 2006.
The benefit you receive at retirement or termination of employment will include two pieces:
1. Service before 2006. This is the benefit you have earned under the plan rules through the end of 2005. This amount will be based upon your service and Final Average Compensation (FAC) determined as of December 31, 2004 increased by 4.5% in 2005, PLUS
2. Service after 2005. Benefits for service performed after December 31, 2005 and pay received after December 31, 2005 will be based upon the program developed as part of the long-term strategy. This program might be a brand new plan, or might just reflect revisions to the existing plan.
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| 3. Regarding the Plan’s lump sum option: a) How is it calculated? b) Is the lump sum provision responsible for the Plan’s funding status? c) Can it be taken away? d) Is there a way to protect the lump sum from income taxes? |
a) The Plan’s lump sum benefit is based upon the interest rate and mortality (life expectancy) table required by the Internal Revenue Service (IRS). The lump sum is calculated in a manner such that, on average, an employee who elects a lump sum and invests the proceeds (at the same rate used to calculate the lump sum) will have enough money to replace the expected monthly lifetime benefits otherwise payable by the Plan.
b) When an employee elects a lump sum payment, the Plan’s liabilities and assets are reduced by an equal amount. However, the reduction in the asset has a greater impact on future earning estimates than the reduction in the liability. The requirement to contribute to the plan is caused by a combination of the reduction in the value of the assets during the downturn in the market, the extraordinarily low interest rates used to calculate the liability, and the average age of the employee population.
c) The Plan’s lump sum feature is protected and will continue to be available with respect to benefits payable in the future for service performed and pay received prior to 2006. The availability of a lump sum on benefits payable for service and pay after 2005 will depend on the provisions of the program developed as part of the long-term strategy.
d) An employee who chooses a lump sum can also elect to defer taxes on the proceeds by rolling the lump sum amount into an Individual Retirement Account (IRA) or into another employer plan that accepts rollovers.
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| 4. What is the Special Early Retirement Benefit (SERB) and how do you qualify for it? |
Typically if you leave and begin collecting your benefit before your normal retirement date, your monthly benefit is reduced to reflect longer payments. The SERB provides long-service employees with the ability to retire from WHOI with an unreduced pension benefit. To qualify, you must have been employed by WHOI prior to January 1, 1999 and, at the time you leave WHOI, you must:
- Be age 60 (or older) with 30 or more years of service, or
- Be age 62 (or older) with 25 or more years of service.
For example, an employee who leaves at age 58 with 35 years of service is not eligible for an unreduced retirement benefit. This employee could elect to receive a full benefit beginning at age 65, or a reduced benefit beginning at any time between his retirement date and age 65.
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| 5. I am considering retiring on December 31, 2005. How do I get an estimate of my retirement benefit? |
It is important that you are aware that the monthly benefit you have earned on December 31, 2005 is protected and will not decrease if you continue employment beyond December 31, 2005.
If you are looking for an estimate of what your retirement figure will be, please see your On-Line Benefits Statement which indicates your age 65 Single Life Annuity benefit as of January 1, 2004.
If you are actually retiring from the Institution in 2005, please contact June Taft to review the retirement process.
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| 6. Regarding the minimum cash balance benefit: a) What interest rate is credited to my account? b) Will my minimum cash balance benefit continue to grow after December 31, 2005? c) How does the annuity payment option work? |
a) Interest is credited based upon a 30-year Treasury bond rate issued by the Internal Revenue Service (IRS). Although the government no longer issues 30-year Treasury bonds, the IRS develops a rate for use by pension plans similar to WHOI’s. The rate for 2004 is 5.12%. b) Your minimum cash balance benefit will continue to receive interest credits after 2005 but unless a specific cash balance plan benefit is provided as part of the long-term strategy, the 8% pay credit will not apply after 2005.
c) If the minimum cash balance benefit applies to you and you choose to receive your benefit in the form of an annuity, your account balance will be converted to a lifetime monthly benefit. Since older employees have a shorter life expectancy than younger employees, the monthly annuity amount will be larger for an older employee, all things being equal. For example, if two employees have identical amounts in their cash balance account and each elects an immediate lifetime annuity, the older employee would receive a larger monthly payment based on life expectancy.
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| 7. How will inflation impact benefits earned prior to 2006? |
Under the short-term strategy, there is no adjustment to benefits earned prior to 2006 for inflation until you reach age 65. Benefits in pay status after age 65 are adjusted annually for inflation, up to a maximum annual increase of 3% per year.
The extent to which benefits for pay and service after 2005 are adjusted for inflation will be addressed as part of the long-term strategy.
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| 8. Is the short- and long-term strategies work about maintaining a competitive program so that WHOI can continue to attract and retain quality staff or is it about reducing costs? |
Both. The cost to maintain the current program is in excess of $7 million per year. As a result, it is highly possible that the long-term strategy will result in a reduction of benefits for future service.
Our current program is very competitive, both among the Joint Oceanographic Institute (JOI) schools as well as among leading employers in the New England area. Our program provides a competitive formula, does not require employee contributions, provides automatic adjustments in certain situations to reflect inflationary increases, and also provides a lump sum option. The challenge for the Task Force is to identify which features of the program are most important to our staff, and to develop a program that finds an acceptable balance between benefit levels, plan features, and cost.
In addition to finding the right long-term solution, the Task Force will develop a strategy to transition from the current plan to the long-term solution.
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| 9. What are the rules concerning WHOI’s ability to change the Plan? |
The Internal Revenue Service (IRS) has very strict rules concerning the changes an employer can make to a retirement program.
First, employees must be advised of certain changes at least 45 days in advance. We complied with this rule through our written communication to employees in the memo from Kathy LaBernz on October 20, 2004 regarding the WHOI Retirement Plan. In addition to the legal requirement, we also conducted the employee meetings to keep everyone up to date and to give employees the ability to ask questions in a public setting.
In addition to the notice requirements, there are several rules concerning the changes that can be made. Most importantly, changes cannot reduce the monthly retirement benefit that has been earned to date, nor can changes alter certain features applicable to the benefit that has been earned to date. To illustrate this point, consider an employee who has earned a benefit equal to $1,000 per month payable at age 65.
- The Plan generally cannot reduce the employee’s age 65 benefit below $1,000.
- The Plan cannot remove the optional payment forms – including the lump sum option – for this $1,000 monthly benefit.
- The Plan cannot remove the Special Early Retirement Benefit (SERB) feature as it applies to this $1,000 monthly benefit, as long as the employee qualifies for the SERB benefit when he or she leaves WHOI.
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| 10. What are the administrative expenses of the WHOI retirement plan? |
The Plan pays a number of expenses in connection with the ongoing administration of the Plan. Examples include expenses for investment managers in connection with the management of the Plan’s assets, fees to the Plan’s actuaries to provide information in connection with the calculation of benefits and to complete the annual valuations required by the Internal Revenue Service (IRS), as well as consultant and legal fees to keep the Plan documents and employee communications up-to-date with respect to legislative changes affecting retirement plans. For the past three years, the Plan’s expenses have averaged six-tenths of one percent of Plan assets.
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| 11. What is the Defense Contract Audit Agency’s (DCAA’s) role in setting the pension cost component of the fringe benefit rate? What is the history of our fringe rate (including the portion attributable to pension)? |
The cost of the Plan is determined by the Plan’s actuaries, in accordance with rules developed by the Internal Revenue Service (IRS). Generally, the DCAA will approve any reasonable cost as determined by the Plan’s actuaries.
As was mentioned in the employee meetings, the DCAA would not compensate WHOI for any contributions to the plan in years in which no contributions were determined to be required by the Plan’s actuaries.
Even without a pension component, WHOI’s fringe rate has increased over the past several years. In 1999 the rate was 34.09% (based on the regular salary rate) and currently (2004) is 48.27% (based on the regular salary rate).
For more information on Governmental Rates, please see the Controller’s website at http://missvr3.whoi.edu/controller/, click on Government Regulation (far right), click on Government Rates (on left), and then choose from Current or Prior Years.
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| Short-Term Cost Mitigation Strategy |
12. How are benefits being affected in the short-term?
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If you are vested when you retire or leave WHOI, you currently receive the greater of your retirement benefit calculated under a defined benefit annuity formula or a benefit based on your minimum cash balance account. Under the current plan, your benefit under the defined benefit annuity formula grows annually with service (up to a maximum of 35 years) and the increase in your Final Average Compensation (FAC). Under the short-term strategy, your benefit under the defined benefit annuity formula will still increase with service but FAC will be frozen as of December 31, 2004, subject to a one-time increase at the rate of 4.5% during 2005. Below is the current plan formula, as well as the effect on the benefit formula after the change.
Your defined benefit annuity formula as it appears in the Summary Plan Description (SPD) equals:
• 2% of your final average compensation (FAC) for each year of credited service, up to 25 years, plus
• 1% of your FAC for each year of credited service over 25 years, up to 35 years.
Your final average compensation is the average of your five highest years of earnings during your last 10 years at WHOI.
Under the short-term strategy, the effect of the Plan change on the Defined Benefit Annuity Formula is that Final Average Compensation (FAC) will be frozen as of December 31, 2004. For employees who are Members and actively employed throughout 2005, the frozen FAC will be subject to a special one-time increase of 4.5% for 2005. For members who terminate employment with WHOI during 2005, the one-time 4.5% increase on frozen FAC will be prorated based on the number of months the Member is employed in 2005.
The minimum cash balance benefit as it appears in the Summary Plan Description (SPD) is the following:
If you earn an hour of service on or after January 1, 1999, and you did not begin receiving your retirement benefit before 1999, the minimum cash balance account is the sum of:
• 8% of your FAC as of December 31, 1998, times each year of credited service as of December 31, 1998 (up to 35 years), plus
• 8% of each year’s compensation from January 1, 1999, onward.
Your minimum cash balance account will be credited with interest annually, based on the 30-year Treasury bond interest rate. Interest will be credited as of December 31 of each plan year. The minimum cash balance account will be paid to you in a lump sum or may be converted to an annuity when you retire or leave WHOI.
For 2005, the cash balance account will continue to increase with 8% of compensation and will be credited with interest. For the short-term solution, after 2005, the account balance will be credited with interest only.
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In order to mitigate costs for 2004, we needed to freeze Final Average Compensation (FAC) as of December 31, 2004; however, the Institution wished to minimize the effect on benefits during 2005. We agreed with our actuaries that indexing of the FAC would achieve our goals of reducing the plan’s cost in the short-term while minimizing the effect on pension accrual for 2005. They recommended that we use the same indexing rate (4.5%) as the long-term assumption the actuary uses for future salary increases in determining plan funding requirements. This rate is based on pensionable pay (annualized earnings that include salary and certain other items such as overtime) which has increased at 4.5% or more in recent years.
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| 14. How is Final Average Compensation (FAC) determined for individuals who are not eligible employees and Plan members (or former Plan members) on December 31, 2004? |
For individuals who are employees on December 31, 2004 but who on that date have not yet completed the year of service to become a Plan Member, as well as individuals first hired by the Institution after December 31, 2004, FAC will equal the average of his/her compensation for the two year period consisting of the year he/she is hired and the following year.
For individuals who terminated employment with the Institution before January 1, 2005, and who are then rehired at some point after 2004, FAC would be that individual’s FAC determined when s/he previously terminated employment.
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| 15. Is the short-term solution really temporary? |
Yes. It is anticipated that the yet-to-be-determined long-term solution will replace the short-term solution January 1, 2006.
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| 16. Is the lump sum option going away? |
No. There are no changes to the lump sum option as part of the short-term solution.
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| Long-Term Cost Mitigation Strategy |
| 17. Has the long-term solution already been determined? |
Definitely not. Our attention has been focused on the short-term solution that has allowed us time to review the best avenue for us to take in the longterm. There needs to be careful analysis of competitive and affordable retirement plans, as well as consideration of Institution and employee needs. It is fair to say that everything will be on the table and no decisions have been made.
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| 18. Is the lump sum option going away? |
Again, deliberations have not taken place nor have decisions been made about keeping or eliminating the lump sum option. Keep in mind that even if the lump sum option were to be eliminated, it could only be eliminated for benefits earned (i.e., based on compensation and service earned) after the change is adopted. You would still be eligible for a lump sum of your accrual up to the date of the change. So, say for instance that a decision is made for the lump sum option to be eliminated on January 1, 2006, you would still be eligible to take a lump sum for the value of any benefits you earned up to that date under the terms of the Plan but not on any amounts accrued after December 31, 2005.
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| 19. What types of long-term solutions will the Task Force consider? |
As the Task Force begins to discuss longterm strategies, an analysis of other retirement plans will be done to help the Task Force decide what types of plans are competitive and affordable in the market place today. Solutions could include modifying our current defined benefit plan, moving to a defined contribution plan such as 403(b) or 401(k) plan, or other alternatives.
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| 20. Who will participate on the expanded Task Force? |
Most of the current Task Force members are continuing and we will be supplementing the committee for a broader representation of the WHOI community.
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| 21. How do I request an estimate of my retirement benefit? |
New online Benefits Statements became available in October and will include your age 65 retirement benefit based on what you have earned through January 1, 2004. If you need retirement estimates for dates from now through December 31, 2005, please e-mail your request to BenefitsQA@whoi.edu .
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