This article originally ran on July 14, 2015.
The public university market can be an interesting test of one’s knowledge and experience if one is working in this marketplace for the first time. Though plans sponsored by public universities are not subject to ERISA, they can share some of the same concerns that exist in ERISA plans. In addition, public university plans have many unique features all their own. This article examines five basic features of public university plans as an introduction to those who may be unfamiliar with this important segment of the nonprofit retirement plan marketplace.
1.) One Size Does Not Fit All
Of all the nonprofit retirement plan markets, the public university market may indeed be the most diverse. Even though, as governmental plans, public university plans are never subject to ERISA, many operate as if they were an ERISA plan, with many ERISA-like best practices in place. This means that, in most cases, there is a single consolidated recordkeeper — or perhaps two vendors at most — who service the plan.
On the flip side, there are also public university plans that operate in a manner quite similar to plans of K-12 school districts, with many vendors. Though this latter type is more prevalent in states where the law is more favorable to multiple-provider situations (such as states with “any willing provider” laws), such a model can be found in states where a one-provider system is more prevalent as well.
In between are some universities, which have started the process of consolidating recordkeepers, but may still maintain a number of providers (typically 3-5). Though this model is present, it is less common than the first two models, and often serves as a transition to a single-provider model.
2.) Primary Plan, Supplemental Plan, or Both?
Since pubic universities are governmental entities, in theory employees of such entities are generally eligible for the state pension system. And indeed, for certain employee classifications — such as civil service employees — the state pension system serves as the primary retirement plan, and the public entity would offer a 403(b) plan as merely a supplement for elective deferrals.
The state generally offers a 457(b) plan to such employees as well, though in some cases the public university may offer a 457(b) plan as an alternative. As an aside, 403(b) plans are generally not offered by states, as states are not an eligible 403(b) plan sponsor, though some states may provide an indirect opportunity for collective purchasing via a state board of regents or a voluntary association, where the universities themselves sponsor the plans, but the plans maintain identical provisions.
However, faculty and administration often have the option of what is often called an optional retirement plan (ORP) or alternative retirement plan (ARP). This is a 401(a) or 403(b) defined contribution plan sponsored by the individual universities to which employer contributions are made in lieu of the state providing a pension benefit to such employees. Often, faculty and administration may choose between the state pension system or the ORP/ARP. In some states there is no choice: faculty and staff are only permitted to participate in the ORP/ARP. The ORP/ARP plan serves as the primary plan for such employees, again supplemented by 403(b) and 457(b) plans for elective deferrals as described above.
Some public universities have withdrawn from the state pension system entirely when permitted by law, though this is a less common model. In this model, all employees participate in plans sponsored solely by the public university, similar to model that exists for private plans, with the difference being that pubic plans are exempt from ERISA.
Finally, in some states, all employees must participate in the state pension system. In those states, the public university only sponsors plans for elective deferrals (403(b) and, perhaps, 457(b)). However this model is less prevalent as well.
3.) Automatic Enrollment, Public University Style
For public universities that sponsor their own primary defined contribution retirement plans (for all employees or just for faculty/administration as described), many “automatically enroll” employees into those primary plans. However, the term “automatic enrollment” is a misnomer here; what the universities actually do is require that employee make a contribution to the plan as a condition of employment or as a one-time irrevocable election of whether or not to participate in the plan. This contribution — known as an employee mandatory contribution — is not subject to the 402(g) elective deferral limit, though it is counted for 415 limit purposes as an employer contribution.
Traditional automatic enrollment is a relative rarity in public university plans, since if a mandatory contribution is present, auto enrollment would require an elective deferral over an above the employee mandatory contribution, unless the employee opts out.
4.) Employer Contributions
If the public university sponsors its own primary defined contribution retirement plan, employer contributions may be more generous that you are used to seeing, especially if you work primarily with healthcare or other private tax-exempt plan sponsor. Employer contributions of 10% or more are not uncommon, but this is not simply due to the fact that public universities are more generous than other nonprofit employers. The primary reasons that the employer contributions are significant are:
The retirement plan serves as an alternative to a DB pension plan of a state retirement system, where a larger employer contribution is necessary to compare to the favorable benefit provisions of the state system. Indeed, some states mandate a level of contributions to an ORP/ARP that is comparable to the state pension system accrual.
In some states, public university employees are not eligible for Social Security.
5.) 415(m) Plans
Some public universities also sponsor 415(m) plans, which are unique to the governmental plan marketplace. For those of you unfamiliar with 415(m) plans, this type of plan is utilized for contributions that cannot be made to a 403(b) or other qualified plan, including a defined benefit plan due to the application of the contribution/benefit limits under Code Section 415
. Any contributions in excess of the limit are made to this separate 415(m) plan.
Unlike 403(b) and other qualified plans, 415(m) plans are unfunded and subject to the creditors of the institution; assets are not owned by the employee until distributed. In many aspects, these plans are similar to 457(b) deferred compensation plans of private tax-exempts, except for the fact that loans are permitted.
Practice Pointer: Even though public university plans are not required to file Forms 5500, typically an abundance of information is available regarding such plans since public universities are well, public! In some cases, even minutes of committees that address retirement plan issues are publicly available. Thus, advisors who are prospecting such organizations can often obtain a wealth of background information.
Michael Webb, TGPC, AIF™, CEBS, chairs the NTSA Communications Committee and is Vice President at Cammack Retirement.
Cammack Retirement is an independent retirement plan consulting firm specializing in non-profit industries. Offering tailored, actionable solutions, to help clients achieve the greatest return on their employee investment, Cammack Retirement delivers end-to-end solutions for complex retirement plan challenges.
Please note that this article is for general informational purposes only, is not intended to be taken as legal advice or a recommended course of action in any given situation. Readers should consult their own legal advisor before taking any actions suggested in this article.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.