College professors could probably teach American workers a thing or two about retirement.
Lesson One: When it comes to defined contribution plans, automatic, if not mandatory, enrollment works.
While industry experts warn that Americans' negative savings rate and lack of planning leave workers woefully unprepared for retirement, higher education faculty fare much better. In fact, 95% of college and university faculty surveyed said that they have begun saving for retirement, compared to only 69% of all working Americans, according to a recent survey conducted by the Employee Benefit Research Institute and Mathew Greenwald & Associates, both in Washington, and the TIAA-CREF Institute of New York.
What's more, 86% of the college and university faculty are somewhat or very confident that their retirement will be a comfortable one, compared to only 65% of the general population, according to the report.
The main reason that college and university faculty are better prepared is not that they are smarter. "There are important differences in retirement plan availability and design in higher education that would contribute to better outcomes," according to the report.
The 403(b) plans offered by universities often incorporate features recommended by industry experts and trade groups, including the Investment Company Institute, such as automatic enrollment and company match incentives, to spur higher participation rates. In fact, participation in these 403(b) plans is often mandatory and contribution levels by workers and institutions are frequently set at pre-determined levels, according to the report.
At a time when guaranteed pensions are scarce and Social Security is not so secure, the hope is that by automatically enrolling workers in a defined contribution plan, they will see that saving for retirement can be painless and productive, and as a result, enrollment in DC plans and savings rates will increase.
Indeed, most college professors today are offered 403(b)s or other defined contribution options rather than pensions, with DC plans accounting for 79% of retirement plan options offered to higher education workers, the survey showed. Thus, getting these professors to take the initiative to join these plans, or requiring it of them, is a critical first step.
"So many people miss the boat," said Doyle R. Pendelton, a certified financial planner based in Austin, Texas.
As it is, 30% of American workers who have access to 401(k) plans never partake in them, according to a recent study conducted by Chicago-based Hewitt Associates. Automatic enrollment could help address that, Pendleton said, "just to make people start thinking about it, if nothing else."
While the recent study offers no specific data about mandatory participation and contribution rates in college retirement savings plans, a 2000 survey conducted by the American Association of University Professors of Washington offers insight. In its own retirement survey, AAUP found that of 394 colleges and universities that offered defined contribution retirement plans to faculty, 315 schools, or 79%, required that faculty members participate, and at 242 of these schools, or 61% of respondents, they set a minimum contribution rate of between 5% and 10% of faculty members' income.
The same survey showed that of the 394 institutions surveyed - ranging from four-year universities to two-year community colleges - 79% matched or otherwise contributed to participants' defined contribution plans, with 37% contributing 10% or more and nearly 14% contributing between 1% and 5%.
Not all industries offer such generous match incentives, of course, but the EBRI report suggests that high enrollment rates account for a workforce that is more confident as they approach retirement.
First, of the 1,307 faculty surveyed in the EBRI study, 49% expect savings from their defined contribution pans to be the major source of their retirement income, compared to 34% of workers overall. Further, 30% of the university faculty expect those funds to comprise the largest portion of their retirement income, compared to 21% of all American workers.
High participation rates also mean that university faculty are more in control of their future and less reliant on the increasingly shaky Social Security safety net than the average American worker. Only 3% of higher education faculty expect Social Security to account for the bulk of their retirement income, compared to 18% of workers overall.
Such fiscal preparedness leads to greater optimism about the golden years. Of those who participated in the EBRI study, 35% of the higher education faculty are "very confident" that they will have enough income after retirement, compared to 25% of the population overall. Another 51% of university staff are "somewhat confident," compared to 40% of workers overall.
The study acknowledged that college faculty, as a group, tend to be older and earn more than the workforce at large. The average salary for a professor at a four-year institution was $72,649 in the 2003-2004 school year, while the average salary among associate professors was $56,197, according to AAUP statistics.
Higher-than-average earnings or not, that doesn't discount the basic premise that saving now is the only way to guarantee a better future, said John S. Longstaff, a certified financial planner with Beechwood Advisory Group in Fresno, Calif. It's even more effective when that savings is mandatory and automatic, Longstaff said. "You've got to do something to fill the gap," he said. "Regardless of their income, that percentage is coming out like clockwork," he said. "This is their Social Security."
The survey also suggested that the ivory towers don't keep college faculty removed from realistic expectations about retirement. University and college faculty tend to have a fairly accurate sense of retirement costs. While 59% of all workers believe that it's possible to live well in retirement on less than 70% of one's annual income at the time they leave the workforce, 37% of college and university staff said they would need somewhere between 70% and 85% of that income. The standard figure offered by most financial planners is somewhere between 70% and 80%.
College and university faculty also tend to spend more time planning for retirement. Two-thirds of the higher education faculty surveyed said that they had tried to determine how much money they would need during retirement, compared to only 42% of the general public. "Most people don't have any idea," Pendleton said.
But the survey also underscored another reason college and university professors tend to be better prepared for retirement than the general population: More of them have access to retirement plans than the general population. Among the faculty surveyed in the EBRI study, 85% worked for colleges or universities that sponsor retirement plans, whereas only 59% of employees in the general working population were offered such a benefit.
And widespread availability may just be the most important lesson learned from the nation's colleges and universities.
"We have the opportunity to ensure that public and private mechanisms are fully engaged to help Americans reach a secure retirement," said ICI President Paul Schott Stevens in a 2005 speech. "It's crucial to America's future."
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