The following is an FYI to explain some often-used acronyms and the elements of the retirement program for UC employees.
UCRP or the University of California Retirement Plan. This is just one piece of the total retirement package, but for some, especially those who have put in many years at UC, it is the key part. Membership to UCRP is automatic and mandatory for UC employees with a career appointment (at least 50 percent time for a year or more).
The UCRP is a defined benefit plan. Some may call it a "traditional pension plan," perhaps similar to one that your parents or grandparents had. In this type of plan, the employer manages funds that are put aside for you and ensures you receive a specific amount of money for life upon your retirement. Retirement benefits are determined by a formula rather than the amount of money you and your employer contribute to the plan.
At UC, the retirement formula is based on your age, years of service credit, and highest three years average salary at retirement. Generally, the older you are and the more service credit you have at retirement, the higher your UC pension will be.
Some UC employees are wondering about the effects of the downturn of the economy and recent volatility in the financial markers on their pensions. Benefits provided to you by UCRP, however, are not affected by gains or losses in plan investments. UCRP is required to pay out vested benefits according to the established formula noted above.
This type of pension plan is a vanishing breed, especially in the private sector, where more and more companies have terminated retirement benefits or opted for programs in which they contribute to a participant's account, but with no guaranteed retirement benefit. Unlike UCRP, the benefit for these programs runs out when the account balance is depleted, regardless of the retiree's age or circumstances.
Under the UCRP, members can elect to retire and receive benefits at any time after they become eligible — that is, when they reach age 50 and leave University employment with at least five years of service credit. In addition to lifetime monthly retirement income, the UCRP provides other benefits, including survivor income, disability benefits and death benefits. Also, in lieu of monthly income and other retirement benefits, eligible members may elect a lump sum cashout upon retirement.
How is UCRP funded? Money for UCRP comes from UC and employee contributions and interest or earnings generated by the plan's investments. Neither UC nor its employees, however, have contributed to UCRP since the early 1990s. Thanks to good management and market performance of UCRP's investments over the years, a surplus accrued, and no employee or employer contributions were required. For nearly 20 years, this surplus has supported the ongoing costs of the plan, including pensions and payments to UC retirees.
Because there have been no contributions for two decades, that surplus is gone and the UC Regents have approved a plan to restart employer and employee contributions to UCRP in April 2010. (Employee contributions are subject to collective bargaining where applicable.)
When contributions resume, mandatory employee contributions that now go to a DC Plan or Defined Contribution Plan — two percent of covered pay for most employees — will be redirected to UCRP. At the same time, the University will make a four percent contribution. While the UC contributions go into a pool to pay plan benefits, the employee contributions will be placed into individual accounts, on a pretax basis. This account, which accrues interest, will help fund your pension. If you leave UC before you are vested or choose not to remain a member of UCRP when you separate, you may take the balance of this fund with you.
The UC Retirement Savings Program is another benefit and part of the total retirement package. The savings program consists of three plans — the Defined Contribution Plan* and the voluntary Tax-Deferred 403(b) and 457(b) Deferred Compensation Plans — which were established to complement UCRP pension benefits. Because contributions to these plans are made on a pretax basis, employees save on current income taxes.
You will hear many references to the DC Plan as the restart of contributions to the UCRP nears. When UC suspended contributions to the UCRP in the early 1990s, it steered employee contributions to a DC Plan, creating a nice little nest egg for many employees. Currently, UCRP members make mandatory pretax contributions to the DC Plan — for most employees, two percent is taken from your monthly checks and placed in this plan.
Although these contributions will be redirected when employee contributions to UCRP restart, the money that has accumulated in your DC Plan will stay there and will be yours when you retire. You will be able to move the money in your DC Plan among various investment options—just as you can now.
As you know, contributing even a little money to your 403(b) and the 457(b) Plans could go a long way in building your total retirement savings. Employees may contribute up to $16,500 annually ($22,000 if age 50 or older at any time in the calendar year) in pretax dollars to each of the 403(b) and the 457(b) Plans.
Review your Personalized Retirement Update and Readiness Guide, which was sent to all active UCRP members in late February. It projects your income and expenses in retirement; shows UCRP and DC, 403 (b) and 457 (b) Plan estimates; compares your current investment mix to various sample investment allocations; and it is a handy educational tool to help you focus on your future.
When you add Social Security benefits, other non-UC savings and investments, and perhaps income from post-retirement or part-time work, your retirement package has even more parts.
All of these possible pieces of the retirement mix, and careful attention to your finances now, could lead to a pretty picture when your UC career is over.
*Employees also have the option of the voluntary After-Tax Defined Contribution Plan. While employees who contribute to this plan do not save on current income tax, they defer taxes on the earnings until the time the earnings are distributed.