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DEFINED BENEFITS/DEFINED CONTRIBUTIONS Defined Benefits A traditional defined benefit (DB) plan is a plan in which the benefit on retirement Defined Contributions is determined by a set formula, rather than depending on investment returns. In a defined contribution plan, contributions are paid into an individual account The benefit in a defined benefit pension plan is determined by a formula that can for each member. incorporate the employee's pay, years of employment, age at retirement, and other The contributions are invested, for example in the stock market, and the returns factors. on the investment (which may be positive or negative) are credited to the In an unfunded defined benefit pension, no assets are set aside and the benefits are individual's account. On retirement, the member's account is used to provide paid for by the employer or other pension sponsor as and when they are paid. retirement benefits, sometimes through the purchase of an annuity which then In a funded plan, contributions provides a regular income. from the employer, and sometimes also from plan members, are invested in a fund towards meeting the benefits. Money contributed can either be from employee salary deferral or from employer The future returns on the investments, and the future benefits to be paid, are not contributions. known in advance, so there is no guarantee that a given level of contributions will In a defined contribution plan, investment risk and investment rewards are be enough to meet the benefits. assumed by each individual/employee/retiree and not by the sponsor/employer.
CONCERNS OF CURRENT EMPLOYEES UNDER CURRENT PLAN 1. Change in the formula in Defined Benefits The current formula for benefits: Benefit per year = 2. 2% * Average of salary for 5 years preceding the retirement year * length of service Major Concerns • The factor 2. 2% may undergo change. • Employee contributions may be increased. 2. Meeting the Shortfall If there is a shortfall in paying for Defined Benefits during a transition to Defined Contribution, those under Defined Benefits may be asked to pay.
CONCERNS ON ADOPTING DEFINED CONTRIBUTION AT THE UM SYSTEM 1. If there is mandatory employee contribution, (in a matching scenario), it may present a financial hardship for some; especially, for young staff. 2. Not all are investment savvy to utilize the freedom to invest. 3. While the cost for the employee is known, the benefits are unknown (till the end). 4. The average university contribution appears to be 9 to 10% in major universities; If UM is to be attractive and adopts such competitive rates, the Defined Contribution cost seems to be more than the Defined Benefits cost.
DATA/FACTS NEEDED TO HELP MAKE A MEANINGFUL DECISION/COMPARISON 1. What is the current status of the stabilization fund? Were the investment results in the last year and current year as bad as forecast? If not, what happens to the employee contribution rate? 2. If the UM system should change to the Defined Contributions, how will the initial shortfall in Defined Benefits be made up? 3. What will be the UM system contribution rate be to a Defined Contribution plan? 4. What will be the mandatory contribution rate from the employees? 5. Will the UM system offer both the Defined Benefits and Defined Contribution Plans?