August 12, 2014

The State University of New York’s Optional Retirement Plan

The State University of New York’s Optional Retirement Plan
Chapter 337 of the Laws of 1964 

Fifty years ago the State University of New York was faced with a dilemma. Undergoing rapid and extensive growth, it was experiencing significant difficulty in recruiting and retaining faculty and professional staff for its new and expanding campuses.

Although the compensation SUNY component units offered was competitive and it offered significant opportunities for career development, candidates proved reluctant to accept appointment to a SUNY position as the State's public retirement systems then required an individual to complete ten years of member service to vest his or her retirement benefits. The reason for such reluctance:   there was great mobility in higher education at the time. It was not unusual for faculty and other staff members to “moved-on” by accepting an appointment at another college or university after three or four years of employment at their college or university and they would lose potential retirement benefits if they were not "vested" when they left.

Colleges and universities in the private sector were not burdened with this "vesting problem" as the majority offered what was referred to as the “national retirement program” for those employed in higher education by participating in the “TIAA-CREF retirement program" offered by the Teachers Insurance and Annuity Association-College Retirement Equities Fund.[i]

In effect, each TIAA-CREF participant had a “personal” TIAA-CREF retirement contract to which the employer and the employee made contribution at rates set by the individual institution. Benefits were paid to participants upon their retirement based on the accumulated value of the “defined contributions” made by the individual and the "participating employer" over his or her  career of service, which would usually encompass employment at a number of colleges and universities. Typically a “new TIAA-CREF private sector enrollee” vested his or her benefits within two or three years of the effective date of his or her initial appointment by the college or university while an individual already having a TIAA-CREF contract in place typically vested the employer’s contributions immediately.

SUNY’s then Director of State University Personnel was assigned the task of creating a solution to the University’s recruitment and retention problem. He drafted a bill that was then enacted into law as Chapter 337 of the Laws of 1964, "The State University Optional Retirement Program," and SUNY became the first public college or university system to participate in TIAA-CRER.

Enacted as Article 8-B of the Education Law, SUNY’s Optional Retirement Program[ii] [ORP] is a defined contribution retirement plan[iii] rather than the "defined benefit retirement plan" offered by New York State public retirement systems.

SUNY's ORP provided that newly appointed members of the professional staff[iv] of the State University of New York, the Community Colleges under the jurisdiction of the State University and the Statutory Contract Colleges at Cornell and Alfred Universities could elect to participate in ORP or, in the alternative, elect to enroll in either the New York State Employees’ Retirement System or the New York State Teachers’ Retirement System.[v]

As to resolving the “vesting problem, §392.4 of the Education Law provides that ”At the end of his [or her] initial year of service, a single contribution in an amount determined pursuant to subdivisions one and two of this section, with interest at the rate of four percentum per annum, shall be made by the state” while subdivision 5 of §392 provides that “The provisions of subdivision four of this section shall not apply to any electing employee other than an employee appointed for a specified period of less than three months who, at the time of initial appointment, owns a contract determined by the board to be similar to those contracts to be purchased under the optional retirement program and issued by the designated insurer or insurers.”

Significantly, §396.of the Education Law provides that “Neither the state, nor state university, nor any electing employer or its local sponsor shall be a party to any contract purchased in whole or in part with contributions made under the optional retirement program established and administered pursuant to this article. No retirement, death, or other benefits shall be payable by the state, or by state university, or by any electing employer or its local sponsor under such optional retirement program. Such benefits shall be paid to electing employees or their beneficiaries by the designated insurer or insurers in accordance with the terms of their contracts.”

To complete the package, the then Director of Personnel [1] drafted legislation authorizing the State University’s “Special Annuity Program"[vi] thereby permitting eligible SUNY staff to participate in a Tax Deferred Annuity plan authorized by §403-b of the Internal Revenue Code and [2] drafted a regulation establishing  a long-term disability insurance program for TIAA-CREF participants[vii]. 

[i] TIAA is the successor to the Carnegie Foundation for the Advancement of Teaching and was created in 1918 by the New York State Legislature for the purpose of providing retirement income for college and university faculty through fixed premium guaranteed deferred annuity contracts. CREF was created in 1952 to permit TIAA participants to elect to have all or a portion of the employer's contributions and their contributions for TIAA invested in equities through CREF.

[ii] Education Law §§390-397.

[iii] Similar “optional” plans subsequently were enacted by the State Department of Education for its eligible employees [Education Department Optional Retirement Program, Article 3 Part 5 of the Education Law] and the then City University of New York for its eligible employees [Article 125-A, the Board of Higher Education Optional Retirement Program].

[iv]See Education Law §390.3

[v] When it was established in 1964 then professional employees could continue in their respective State retirement system or elect to participate in ORP. Such an individual electing ORP not yet eligible to vest his or her  State retirement benefits of the time he or she enrolled in ORP would receive "member service credit" for the purposes of vesting his or her benefits in his or her public retirement system during the period of his or her continued uninterrupted service with SUNY in ORP.

[vi] See Article 8-C of the Education Law.

[vii] See 8 NYCRR 309, State University Group Disability Insurance Program.