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As a newly hired faculty member of the Minnesota State Colleges and Universities (MnSCU) who meets MnSCU eligibility requirements, you have a one-time opportunity to elect your primary pension coverage. You should have received notification of your eligibility from your campus Human Resources representative. During the one-year election period, you may choose to participate in the Teachers Retirement Association (TRA) or the Individual Retirement Account Plan (IRAP) (Minnesota Statutes 354B.21).
As a newly-tenured faculty member of the Minnesota State Colleges and Universities (MnSCU), you have an opportunity to transfer retirement coverage from your individual retirement plan (IRAP) to the Teachers Retirement Association (TRA). You are eligible to make the election to transfer retirement coverage to TRA at any time up to one year from your date of tenure.
(Minnesota Statutes 2009, Section 354B.21, subd. 2 - authority expires with respect to any MnSCU faculty initially hired after June 30, 2014.)
This decision is a very important one since it ultimately determines the amount of income you may have at the time of your retirement. Once made, this decision is irrevocable and cannot be changed.
The first thing you will need to understand is the difference between a defined benefit plan and a defined contribution plan. TRA is a defined benefit plan. IRAP is a defined contribution plan.
Defined Contribution Plan
A defined contribution plan is a plan with individual accounts for each member, similar to a 401(k) or Individual Retirement Account (IRA). Each member is responsible for deciding how to invest their own account. If investment results are poor, the account balance is low; if investment results are high, the account grows. The amount contributed by the employee and employer each year is "defined." The amount of benefits that will be available to the member at retirement depend on investment results. They are unknown in advance and there is no guarantee of growth, nor any guarantee that funds will last for the retiree's lifetime.
Defined Benefit Plan
A defined benefit plan provides a specific monthly amount at retirement. The benefit amount at the end of your career is "defined" by a pre-established formula that is based on your salary, length of service and age at retirement. The monthly benefits are determined by Minnesota law, not investment results. Investment decisions providing retirement benefit financing are made by investment experts associated with the retirement fund for all participants of the group.
TRA is a defined benefit plan (401(a)), which upon retirement, provides you with a monthly benefit for your life based on a formula that includes your final high-five average salary, years of allowable teaching service and age at retirement.
The key advantage of TRA's defined benefit plan is that you do not bear the risk of volatile investment returns; investment outcomes do not determine your benefit at retirement. Your age, highest successive five years of salary, length of service, and a multiplier determine your benefit.
Another advantage of participating in TRA's defined benefit plan is that the benefit is paid for your lifetime. If you elect TRA, you need not make any other decision until you retire. At that time, you are eligible to choose one of six plans; all plans offer you a lifetime benefit. Depending on which plan you choose, benefits will also be paid for your beneficiary's lifetime.
As a defined benefit plan, your TRA benefit offers the following features:
Lifetime payments -- a lifetime benefit with no investment risk to you despite any volatility of the market. Based on your high-five average salary at the time of retirement, not on the investment market.
Investment returns -- invested with a long-term horizon in large asset pools by experts through the Minnesota State Board of Investment (SBI), the risk is minimized through diversification. Historically, this type of investment management generates higher rates of return than the more conservative, individual investments usually made by individual defined contribution plan participants.
Low three-year vesting -- Vesting means the years of service and age needed to be eligible for monthly benefits. You are eligible for monthly retirement benefits at age 55 with three years of service. With three years of service, you are also eligible for monthly disability benefits and benefits for a survivor if you are deceased prior to your retirement.
Portability -- If you decide to leave teaching, you may leave your contributions in TRA. Your future monthly benefit amount will grow, at a rate designated in statute, until you retire. This deferred option protects your right to receive a monthly TRA annuity benefit in the future, even if you decide to leave your TRA-covered position. Your deferred benefit is predictable and not dependent on investment performance.
Post-retirement increases -- annual post-retirement increases may be applied to your benefit depending upon state law.
Predictability -- a specific percentage of your high-five average salary based on your age and years of service at retirement determines your benefit. Your benefit is not dependent on investment performance before you retire.
Pre-retirement coverage -- survivor benefits are available if you die before retirement. Disability benefits are also available. This comprehensive coverage requires no additional cost to you beyond your ongoing employee contributions.
In addition to participating in either TRA or IRAP, after meeting the eligibility requirements, your participation in the College Supplemental Plan — a defined contribution plan — is mandatory. You may also choose to participate in a 457 (deferred compensation) or a 403(b) (tax-sheltered annuity) plan, which are also defined contribution plans.
Choosing to participate in TRA — a defined benefit plan — will ensure balanced retirement planning. Take advantage of the best of both worlds by choosing to participate in a defined benefit plan (TRA) along with your other defined contribution plan options.
We hope you will take the time to review the following information before you make a final decision regarding your pension coverage:
If you still have questions, feel free to contact a TRA representative at 800.657.3669 or 651.296.2409.