taken from the May 2002 AAUP AZ Advocate

The Arizona Board of Regents Optional Retirement Plan (ORP)

by Ray Martin

The Regents’ plan was established in the early 1970s as an enhancement to allow the three state universities and the newly established College of Medicine to compete with other higher educational institutions for faculty, research and administrative personnel. The Optional Retirement Plan (ORP) is a "defined contribution" plan whereby the participant deposits 7% of their income and the state matches with 7%. The ORP is quite different than the State’s original, and still existing, "defined benefit" plan referred to as the Arizona State Retirement Plan (ASRP). For the ORP, eligible employees must declare their desire to participate within 30 days of their hiring or reclassification.

The primary difference between the ORP and the ASRP is based upon who assumes the risk. In the ORP, the output is based on the growth of the deposited dollars, while in the ASRP there is a defined, state-controlled benefit. The ORP participant assumes any market risk and has the burden or benefit of deciding how the money gets invested between the savings/investment options within the particular plan.

When the plan was first established and went to bid, the Regents allowed two annuity companies the opportunity to offer their product. These companies are TIAA-CREF (Teachers Insurance Annuity Association) and VALIC (Variable Annuity Life Insurance Company) and are still part of the Plan today. The Regents have a formal review at least every five years and may or may not put the Plan out to bid. The Regents have issued three requests for proposal (RFP) over the past fifteen years. Each time TIAA-CREF and VALIC have had to resubmit their proposal according to the RFP guidelines along with any other interested parties. In 1995, two companies, Aetna and Fidelity Investments were added to the list while maintaining TIAA-CREF and VALIC. This, for the first time, brought to the table a pure investment management company (mutual fund) in Fidelity. In 2000, another RFP went out and the Vanguard Group was added while AETNA was disallowed to solicit new participants. Now the Plan has two traditional annuity companies and two mutual fund companies.

One of the reasons that we have seen these changes has to do with the way the Plan’s distribution options have been interpreted. It used to be that, once a participant retired, an annuity distribution option was selected based on the accumulated asset value and the life expectancy of said participant, individually or with beneficiary. This selection was irrevocable and no assets ever remained to the participant’s estate. Then it was argued that the participant should not be restricted on the distribution methodology on his or her own contributions. The participant could then either "annuitize," withdraw or rollover their employee-contributed funds as they deemed fit. However, the employer-contributed funds had to be distributed based upon life expectancy or annuitization. As of this past August, however, the restrictions placed upon the employer’s contributions have been relaxed. Now, all of the accumulated value is available to be allocated for distribution by the participant. Insurance companies would love for one to annuitize their account but this may or may not be in participant’s best interest.

Objective counseling and advice has been noticeably absent as an integral part of the ORP. While the Regents have provided excellent options and flexibility, the participant must take all of the initiative to investigate and make the tough investment decisions. This situation is similar to what has been ongoing within private industry’s 401K retirement plans. Employees have long complained about a lack of guidance in plan allocations. Right now, there is a national debate within congress as to how to best deal with this lack of adequate advice for the participants. Labor and Pension law place heavy responsibility on employers regarding retirement plan offerings and administration. Employers shun the liability associated with "advice" and participants suffer from the lack of "advice". The US House of Representatives and the US Senate are presently working on bills which will encourage the employer to facilitate professional advice to the employee while relieving the employer of the liability of such advice. Whatever the outcome of the legislation, it surely emphasizes the need for "advice." Regardless of any formalized program, the participant can always seek out competent and objective professional advice.

The ORP participant has a much tougher decision maze than the 401K participants in that four (4) investment "packages" are made available while only one (1) screened "package" is made available in the 401K environment. The ORP participant actually has the flexibility to use combinations and portability within these four packages. This remains quite the challenge for the novice investor to truly optimize the allocation for both the accumulation and the distribution phases of participation.