Agenda Item No. V. B. 2.

Washburn University Board of Regents





SUBJECT: Retirement Program Change



BACKGROUND:



The goal of the University's retirement plan is to help employees achieve an appropriate replacement income in retirement. A 60% income replacement is a generally accepted target. The Internal Revenue code for 2004 caps voluntary contributions to tax deferred retirement accounts for those over 50 years of age at $16,000. Individuals at higher salaries, particularly younger than 50, can not get to 60% replacement through the combination of Social Security and tax deferred retirement savings. Mandatory retirement contributions are both tax deferred and exempt from the $16,000 annual cap.

In effect the mandatory contribution, when combined with the up to $16,000 cap, can help individuals come closer to the 60% replacement value.



In December 1998 we amended our program to require those above $70,000 to defer an additional 3% of salary into the university's authorized retirement program system for just such reasons. At the December 9, 1998 Board of Regents meeting, the Board approved a change to the retirement program by establishing a mandatory employee contribution. The mandatory 3% retirement contribution approved by the Board applies only to employees with a salary of $70,000 or more. This change, enabled employees to tax defer a larger portion of their retirement contributions if they chose to make additional voluntary contributions to the retirement program over and above the mandatory 3% contribution, thus, enabling these employees to develop a retirement program which would provide replacement income of approximately 60% upon retirement.



Since 1998, the maximum amount which an employee may voluntarily contribute to the University's Retirement Program has increased from $10,000 to $13,000 for calendar year 2004. Employees who are over 50, can make voluntary contributions up to $16,000 for calendar year 2004. In addition, the University has added an additional retirement vehicle affording employees greater flexibility in planning retirement - the Deferred Compensation Plan authorized by section 457 of the Internal Revenue Code approved May 15, 2002. Even with the section 457 plan, there is still a need to provide a vehicle by which higher compensated employees could achieve up to 60% replacement income at retirement.



DESCRIPTION:



To enable higher paid employees to tax defer a larger portion of their income, the University wishes to establish another two additional levels of mandatory employee contribution toward the University's Retirement Program. An additional 3% mandatory contribution would be added to those with salary of $130,000 or more with an additional 3% mandatory for those with salary of $190,000 or more.The additional mandatory contribution would apply only to employees with a salary of $130,000 or more. Thus, employees whose salary is $70,000 or more would continue to contribute the mandatory 3%, and employees whose salary is $130,000 or more would contribute a mandatory 6% and those over $190,000 would make a 9% mandatory contribution.



There are currently 10 employees with salaries of $130,000 or more. Since the majority of these employees are already contributing an additional 3% or more on a voluntary basis, they could avoid a reduction in take home pay by reducing their voluntary contribution by the additional 3% mandatory contribution. However, if the employee is making the maximum voluntary contribution, he or she could make the 6% mandatory contribution plus the maximum voluntary contribution and maximize their TIAA-CREF contracts.. The net result is that the employee could contribute 3% more to his or her TIAA-CREF contracts.



The administration has contacted the employees affected by the proposal whose elective deferrals are less than the additional 3%mandatory amounts and have found acceptance of the proposed new mandatory contribution.



FINANCIAL IMPLICATIONS:



None. The additional 3% mandatory retirement contribution will be funded by those benefit-eligible employees making $130,000 or more.



RECOMMENDATION:



President Farley recommends the Board of Regents approve the implementation of an additional 3% mandatory contribution, for a total mandatory contribution of 6% to the basic retirement program for employees with annual contractual salaries oftwo additional tiers of mandatory contributions as outlined for employees earning salaries of $130,000 or more, effective January 1, 2005.





________________________

Date Jerry Farley, President


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