The MIT Retirement Plan recently has undergone some changes that present new choices for members. It is particularly important for those nearing retirement age to understand the options available to them. The Benefits Office will soon initiate mailings and group meetings for members, but here Glenn P. Strehle, vice president for finance and treasurer, presents answers to some basic questions.
Q. What are the key choices members have at retirement?
A. There are three major options. Members can begin their annuity payments immediately following retirement, defer the start of payments to any month until they reach age 70.5, or receive a portion of their benefit as a lump sum rather than an annuity from the Plan. For those who defer the start of payments, there is now a Minimum Distribution Option (MDO) that provides additional flexibility to those required by law to begin their benefits by age 70.5.
Q. If an annuity is elected, what determines the Fixed Fund valuation when the monthly annuity begins?
A. The member's book value in the Fixed Fund of the Plan is the total of the monthly contributions by the member, by MIT and the monthly earnings credited to the member's accounts. Just before starting annuity payments, the value is adjusted upward if the book value is exceeded by the current market value. (Separate market value adjustment rules apply to those Fixed Fund accounts that result from transfers from the Variable Fund.)
Q. How is the member's adjusted book value converted to an annuity?
A. An annuity purchase interest rate and a mortality table are used to determine the size of the monthly cash benefit, based upon the particular annuity option chosen. The interest rate used is the past 12-month average interest rate for 10-year Treasury bonds. To achieve a smoothing of the annuity purchase interest rate, it cannot go up or down by more than a quarter of one percent per quarter.
When a member annuitizes his/her Fixed Fund account, the member's share of assets is shifted at market value from the Fixed Fund to the Benefits Fund (Fixed Fund assets are all related to member accounts; the Benefits Fund assets all correspond to the funding of the liabilities of MIT for the Plan).
Q. Is there a change in how the annuity may be determined?
A. A recent Plan change offers an important choice for those electing to receive a retirement annuity from their Fixed Fund balances from January 1, 1995, through January 1, 1996. If interest rates decline in the next few years, the alternative formula may provide a more favorable annuity relative to present account balances for those who retire and start annuities now.
Q. What brought about the change?
A. In 1985, we adopted market-based methods of valuation. Since then, the market value adjustment has always been positive and, in addition, the annuity purchase interest rate fluctuated much less than the market interest rates. During almost all of this period, the annuity purchase interest rates were higher than the interest rates available in the market.
But by 1993 the decline in market interest rates reached a 20-year low and caused the annuity purchase interest rate to decline. When interest rates rose rapidly in 1994, they caused a decline in bond prices and, correspondingly, in the market value adjustment. By contrast, the smoothing formula used to determine the annuity purchase interest rate was slow to react to the higher interest rates because its increases are limited to no more than one quarter of one percent per quarter. As a result, the size of annuities in dollars relative to account balances for those starting their annuities was still declining in mid-1994 while interest rates were rising.
Q. What was done to address this issue?
A. The MIT Plan was recently amended to allow an alternative formula for determining the annuity purchase interest rate from January 1, 1995 forward for a class of retirees. This is the group of retirees who started their annuity payments beginning January 1, 1993 through December 1, 1994 and those retirees who will begin receiving their annuities from January 1, 1995 through January 1, 1996. The alternative formula employs a 7.25 percent annuity purchase interest rate and a 5 percent market value adjustment. The effect is to bring the effective interest rate applied to the book value of member accounts to approximately 8 percent. These retirees will receive the higher of the annuities determined by the regular formula and the new alternative formula.
Q. What is the future outlook?
A. If interest rates stay near today's levels (around 7.25 percent) or increase, the regular annuity purchase interest rate, which is now 6.51 percent, will increase to around 7.25 percent by January 1, 1996. After that date the alternative formula no longer applies. If interest rates decline, the annuities payable under the regular formula could be less. The alternative formula provides those thinking about starting their annuity payments over the next year an opportunity to have the larger of the two formulas. Unless the Fixed Fund has a large increase in the market value adjustment (now below 5 percent), we expect the retirement benefits determined by the alternative formula to exceed those determined by the regular formula until at least October 1, 1995.
Q: How do the retirement benefits from member accounts in the Fixed Fund compare with TIAA, which is the plan offered by many other universities?
A: We asked our actuaries to make this comaprison. They told us that the starting annuities from the Fixed Fund for retirees are higher than from TIAA for identical contributions. This comparison covered a wide range of ages at retirement and years of service. We also point out that the annuities resulting from Fixed Fund accounts are fixed for life while those from TIAA will vary depending upon future interest rates. Declining interest rates over the past decade have caused their annuity payments to retirees to decline while ours were unchanged. In addition, before beginning their retirement annuities, our Fixed Fund members can choose a lump sum payment rather than having that portion of their benefit in the form of an annuity.
Q. What are other Plan changes?
A. One provides members with much greater flexibility to withdraw a large portion of their accounts as a lump sum after retirement as an alternative to starting an annuity. Another change was to permit those at age 70.5 to begin their benefit under the tax rules for a Minimum Distribution Option (MDO) rather than as an annuity.
Q. Are there likely to be more changes in the Plan?
A. Members should expect continued enhancements to the Plan to keep it responsive to changing conditions and regulations.
Q. Where can members get more detailed information?
A. The characteristics of the MIT Plan I have described are summaries of provisions that are quite detailed. I did not review many features of the Plan. The summary information given here does not alter the actual terms of the Plan, which are fully set forth in the Plan documents. The booklet, "Your MIT Retirement Plan," available from the Benefits Office, and the Summary Annual Report mailed to all members provide much helpful information.
A version of this article appeared in MIT Tech Talk on April 5, 1995.