Your first few days in a new university job can be comically simple for someone with multiple advanced degrees. The types of questions you have to answer include: How do I find my parking space? Where is my desk? Where is the coffee maker? Pretty soon, the hard work will begin, but at the beginning, the orientation questions are pretty basic.
But one question is far from basic and determining an answer can be fairly stressful: Which retirement system do I go with: TRS or ORP are the acronyms for the University of Texas, Texas A&M University, and Texas Tech. The choices are STRS or ARP for The Ohio State University and Option 1 or Option 2 at the University of Oklahoma. As you can see, the actual names depend on your particular university.
In Texas, TRS and ORP refer to The Teachers’ Retirement System (a.k.a. a defined benefit plan) and the Optional Retirement Plan (a.k.a. a defined contribution plan). The answer you come up with is both important and irrevocable in many plans. In this moment, you are deciding on the behavior and character of your retirement years, and the decision you make likely cannot be changed. It’s a lot to think about when starting a new job, but the payroll department needs to know right away.
The choice is between a traditional defined benefit pension plan (TRS) where the university manages the investment of contributions they make on your behalf and a defined contribution plan where you are responsible for investing the funds in exchange for more ownership and flexibility (ORP). While the names change depending on the university and the state, the concepts remain the same. We work with universities in many states, but for the purposes of this article, we will stick to the naming conventions of our home state of Texas. If you find yourself presented with a decision involving different names, please feel free to ask us for clarification.
TRS, or the Teacher’s Retirement System (in Texas); Otherwise Known as a Defined Benefit Plan
TRS is a version of the defined benefit pension systems of old. As you add service years, your benefit calculation grows, and upon retirement you receive a monthly paycheck. The state is responsible for coming up with the money, so no investing is required on your end. In Texas, the TRS system has the following properties:
- You contribute 7.7% of salary, while the university contributes 6.8% of your salary on your behalf.
- Your years of service and salary determine the ultimate monthly pension benefit. (The full Texas formula is here if interested.)
- When you retire, you will have the choice between several annuitization options. You may wish to have payments continue for your lifetime. Alternatively, you may choose a reduced payment that lasts for both your lifetime and that of a spouse.
- In some cases, you can “buy” additional years of service, which can greatly impact your ultimate retirement benefit. We recommend talking to a representative in your state’s pension office to get the details on this option if contemplating such a strategy.
In our opinion, the beauty of the TRS option is its simplicity. There are no investment decisions to make, or even an account to monitor. If you stay in the university system long enough, then you can retire with a guaranteed income for life.
The potential downside of the TRS option is it is largely designed to reward long periods of service to a single university system. Should you move to private industry or to another university system, you may find yourself “starting over” on an entirely different retirement plan. There usually is an option to roll your TRS balance into a retirement account when switching jobs, so all is not lost if you end up moving. But, the numbers will likely be sub-optimal in the long run if you are likely to change employers multiple times during your career. The average person has 10 jobs before the age of 40, according to the Bureau of Labor Statistics. Another key factor to consider when selecting the TRS option is the importance of choosing a beneficiary.
ORP, or the Optional Retirement Plan (in Texas); otherwise known as a Defined Contribution plan
The ORP behaves much like a 401(k) does in the private sector. (The ORP is in fact a cousin of the 401(k). It is technically a 403(b) retirement account.) You and your employer both contribute to an account, and then you, or your financial advisor, have responsibility for investing the funds in that account. The university does not choose investments for you. When you ultimately retire, you can draw funds from that account as you see fit. In Texas, the current ORP system has the following properties:
- You contribute 6.65% of your salary, while the university contributes 6.8% of your salary on your behalf.
- You can choose between a group of plan providers, each offering their own set of investment options. Be sure to review fund choices and fees carefully! Fortunately, your choice of ORP plan providers can be changed. Rollovers between providers are permitted.
- When you retire, you have control over how much you withdraw from the account. The government does require minimum annual distributions, which start at roughly 4% at age 72, and ratchet up as you age.
- Should you still have a balance in the account upon your death, you can specify who will receive it. This is in contrast to the TRS option, which has no value after its beneficiary or beneficiaries die.
Depending on your perspective on investing, the ORP’s main benefit or drawback is the ability to direct how it is invested. The other main benefit of the ORP is its flexibility during retirement. Unlike the TRS plan, which will pay out based on a defined formula, the ORP’s payout can be tailored to meet your spending needs as they rise and fall.
So which option is best for you?
A lot of the decision will come down to how you feel about investing and how much you value simplicity. TRS is likely the simplest option, because you are effectively outsourcing the management of your retirement to your employer. The ORP adds complexity, but puts the investment reins in your hands.
Before you rule out the TRS option, note that defined benefit pension plans are exceedingly rare today. They have been phased out, especially in the private sector, largely because they have proven to be excellent deals for retirees and extremely expensive for employers. You have a unique opportunity to participate in such a plan, so we recommend against dismissing it too quickly. As a university employee, you have other options to save in tax-deferred investment vehicles similar to the ORP, so you could build a mix of both pension and defined contribution assets. As part of Briaud Financial Advisors’ comprehensive financial planning process, we spend a considerable amount of time reducing our clients’ tax liabilities. We can give you expert guidance on how to avoid tax penalties.
Working through the decision
We guide many university professors and administrators through these decisions and we would be happy to talk to you more about it. At Briaud, we are university retirement planning experts. Contact us to schedule an initial, complimentary meeting.
Bonus Tip: Be sure to review your beneficiary designations carefully on these and any other retirement accounts you might have. Retirement accounts, annuities, and life insurance benefits pass to your heirs via the beneficiary designations on those accounts, not your will! We recommend reviewing beneficiary designations annually, since families and estate plans can change over time. Also, if there is any part of the beneficiary designation form that you do not understand, we strongly recommend talking to an expert. You do not want to make a mistake on such an important task!