1999-05 Final Report of the FPC Subcommittee on Changes to ... · 3.1f) Elimination of Post-Tax...

*TheSubcommittee’sInterimReportisattachedattheendofthisreport.

FinalReport

TotheFacultyPolicyCommittee

May10,1999

SubcommitteeonChangestotheMITRetirementPlan

"StudyingtheMITRetirementPlanislikepeelinganonion:there'salwaysanotherlayer"Goal:Tounderstandandtoconvey,byawrittenreporttotheFacultyPolicyCommittee,theeffectoftheproposedchangesintheRetirementPlanonitsmembers,andtomakesuggestionsforimprovement.Charge:1. Toanalyzeandunderstandthedifferencesbetweentheproposedchangesandthe

currentPlanintermsof:

• availableoptionsandservices,and• risks(ontheupsideandthedownside)tomembers

2. Tohighlightanyspecificissuesthatmaycauseproblemsorpresentopportunitiesformembers.

3. Toidentifyspecificsuggestions,ifthereareany,ofmodificationsintheproposedchangesthatcouldalleviateanyoftheidentifiedproblems.

4. Toconveyinawrittenreporttheresultsofthisanalysis.TheSubcommitteemembershipis:

SheilaWidnall,[email protected]@[email protected]@[email protected]@mit.edu

ReportoftheFPCSubcommitteeonChangestotheMITRetirementPlan 2

TableofContentsCommitteeChargeandMembership1.SummaryandConclusions2.Overview

2.1ComponentsoftheMITRetirementPlan2.2WhytheNeedforChange?2.3HighlightsofChangestothePlan

3.ChangestotheSupplemental401(k)/RPSMPlan

3.1Changesinthe401(k)PlanPre-Retirement3.1a)IncreaseinAllowableEmployeePre-TaxContributions3.1b)OutsourcingofFundManagementtoFidelitywithAdditionalInvestmentOfferingsAvailableSpring19993.1c)TransferofInvestmentExpensestoParticipants3.1d)ChangeinFixedFundAccountingtoMarketValue3.1e)AdditionofImmediateVesting3.1f)EliminationofPost-TaxContributionsonJanuary1,20003.1g)Loansavailable(withIRSrestrictions)3.1h)OptionsInitiatedonJanuary1,1999

3.2401(k)Post-RetirementWithdrawals,Annuities,andLumpSumDistributions3.2a)MIT401(k)WithdrawalOptions3.2b)ProvisionforEarlyDistributionofPlanAssets3.2c)AdditionofNewAnnuityOptions3.2d)DeathBenefits

4.ChangesEffectiveJanuary1,1999intheBasicPlan

4.1Pre-RetirementChanges4.1a)AccumulationofBenefitsforthe5%andthe1.65%Accounts4.1b)BenefitsAccruedpastNormalRetirementAge(NRA)4.1c)Pre-RetirementRPE

4.2Post-RetirementChanges4.2a)ChangingoftheNormalRetirementAgefrom65to62


4.2b)LumpSumPayout4.2c)AnnuityPayments

5.ParticipantServices

5.1Communications5.2Counseling

Appendix1:GlossaryofTermsAppendix2:AnnualExpenseRatiosforVariousMutualFundsAppendix3:Reviewofthe"MarketValueAdjustment"IssueAppendix4:Interestonthe5%AccountAppendix5:DistributionsfromMIT401(k)PlanandIRAs


1.SummaryandConclusionsTheBenefitsOfficeinconjunctionwiththeStrategicReviewofBenefitsCommitteeandtheCommitteeonFacultyAdministrationhavedevelopedandimplementedchangestodealwithissuesaffectingtheMITRetirementPlan(MITRP).SomeoftheproposedchangesarerequiredtokeepthePlantax-qualified,andwereinstitutedonJanuary1,1999;someofferincreasedflexibilitytodrawretirementbenefitswhileworkingparttimeandofferincreasedbenefitsfromaloweringofthenormalretirementagetoallowindividualstophaseintoretirement.Onecomponentofthechangesisaresponsetoconcernsthatforthedefined-contribution401(k)portionofthePlan,theinvestmentoptionsweretoolimited,withonlytheFixedandVariableFundavailableformanagingparticipants'accounts.Thechangesthatprovideaccesstoawidersetofoptionswillallowparticipantstobuildaninvestmentportfoliotomeettheirindividualneedsandtotailorwithdrawalsafterretirementaccordingtopersonalneeds.Finally,sincetheservicingofthePlanhasgottenbeyondthecapacityofMITtomanage,theadministrationofthe401(k)portionofthePlanwillbeoutsourced.TheseproposalsforchangehavebeenpresentedtotheMITcommunityinavarietyofforums.Buttheissuesarecomplexandconstrainedbylegalandregulatoryrequirements.Somearehighlytechnical,requiringconsiderableefforttomasterallthedetails.Therefore,theFacultyPolicyCommitteeappointedthisSubcommitteetostudytheseproposedchanges,andtorecommendmodifications,ifnecessary,tomeetexpressedconcerns.ItisnottheintentionofthisreporttosubstituteforMITRPdescriptions,documentsandtheannualreports,whichareavailablefromtheBenefitsOfficeandontheirwebsite,http://hrweb.mit.edu/benefits.Ratherwewishtolayasufficientfoundationforourobservationsandconclusions.WehopethattheworkofthisSubcommitteewillhelpinthediscussionofthechangesinprogress.Also,wehavenotattemptedtodescribeallfeaturesofthePlanindetail;weonlydiscussthechangesfromthepreviousPlan.SincethetermsoftheMITRetirementPlanarestatedinthePlandocument,thelegaldocumentgoverningparticipants'rightsandbenefitsunderthePlan,ifthereisanyconflictbetweenthisreportandthePlandocument,thePlandocumentwillcontrol.InourreviewofthemanychangestothePlan,sixissueshavereceivedmostofourattention,andourconclusionsabouttheseitemscanbesummarizedasfollows.Eachisdiscussedinmoredetailinthebodyofthisreport.TheChoiceofFidelityInvestmentstoManagetheDefinedContribution/401(k)Assets.AsofApril1,1999,themanagementofthiscomponentofPlanassetswillbecarriedoutusingtheservicesofFidelityInvestmentstomanageindividualinvestmentaccountsforparticipants.WehavereviewedthestepsthattheBenefitsOfficewentthrough,seekingbidsandnegotiatingfees,andwearecomfortablewiththeprocedurefollowed.


TheShiftingof401(k)InvestmentAccountExpensesfromMITtotheParticipants.Forthosewhoremaininvestedinthefundsthathavebeen"cloned"fromtheMITFixedandVariableFunds,thischangewillresultinasmallreductioninthegrowthofaparticipant'sultimateretirementassets.Theincreasedoptiontochooseotherfundswithpossiblyhigherreturnsmaymakeupforthisloss.Wealsobelievethatthischangeshouldbeconsideredinbalancewithallofthechanges,severalofwhichincreasebenefitstoparticipants.Allinall,itisourconclusionthatthischange,whichputsusinlinewithalmostallourcompetinginstitutions,isreasonable.RequiredEliminationoftheFixedFundBookValueProcedureandMIT'sMethodforMakingtheChangetoCurrentMarketValue.Tocalculatethe"bookvalue"ofmemberFixedFundaccountsafive-yearsmoothingprocedureforcreditingcapitalgainswasusedbyMIT,withtheobjectiveofloweringthevolatilityofcreditedreturns.Withtherequiredmoveoffixedfundaccountingtomarketvalue,aportionofthecapitalgainsofrecentyearshadtobeallocatedtomemberaccountstobringthemtomarketvalueasofJanuary1,1999.Wehavereviewedtheprocedureusedtoallocatecapitalgainstomemberaccounts,anditspotentialforcreatinginequitiesbetweenmembersoflongstandingandthosewhojoinedonlyrecently,andfoundittobeasoundapproach.The(Mandated)ChoiceofanIndexOutsideMIT'sControlforCalculatingReturnsonCertainAccounts.Inthepast,theinvestmentgrowthoftheFixedFundwasusedtodeterminethegrowthofthenotional5%account,whichisacomponentoftheMIT-fundeddefinedbenefitcomponentoftheMITRP.UnderthecurrentIRSregulations,thecontinueduseoftheFixedFundappreciation,asitismanagedbyMIT,isnotanoptionsinceIRSnowrequiresanarm's-lengthmethodtocomputeaccountgrowth.Therefore,tocomputethegrowthofthe5%accountafterJanuary1,1999,MITmustselectsomemarketindexwhosegrowthisoutsidethecontrolofMIT.MIThaschosenanalternativeindexforthe5%account,andspecifiedmaximumandminimumvaluesforitsgrowth.ItistheSubcommittee'sjudgmentthatthisprocedureisappropriate.TheIncreasedFlexibilityAvailabletoPlanParticipants.Withtheoutsourcingofboththeinvestmentmanagementandtherecordkeepingofthe401(k)portionofthePlan,anincreasedrangeofservicesisavailabletoparticipantsforinvestmentsandwithdrawalsundertheMITRP.WebelievethatthisincreasedflexibilityprovidesabenefittomanyPlanparticipants.Howeverincreasedoptionscomewithincreasedcomplexity.Therefore,Planparticipantsshouldre-examinetheirpersonalcircumstances,asthisisacomplexareainvolvingassetallocationaswellastaxandestateplanning.Communications.WiththemovetoanoutsidevendorandtheincreasedflexibilityprovidedtoPlanparticipants,communicationandprecisedescriptionofPlanoptionsandconsequencesbecomecritical.WeurgetheBenefitsOffice,togetherwithFidelityInvestments,tocontinuetodevelopmaterialthatcanprovidePlanparticipantswithabetterunderstandingoftheirpre-andpost-retirementoptions.SuchmaterialasnowexistsdoesnotdealadequatelywiththechoicesfacedundertherevisedPlan.


Inthisreport,wecoverthekeyfeaturesofthechangesmadeasofJanuary1,1999,andfurtherrevisionsmadeinspring1999andyettocome.Anumberofspecializedtermsandacronymsareusedinthepresentation,andthesearedefinedinAppendix1.WewereaidedinourdeliberationsbystafffromtheBenefitsOffice,thePersonnelOfficeandtheTreasurer'sOffice.Wethankthemfortheircollegialandexpertinputtoourunderstandingoftheseissues.2.Overview2.1ComponentsoftheMITRetirementPlanForthepasttenyears,theMITRetirementPlan(MITRP)hasconsistedoftwocomponents,theBasicPlan—adefinedbenefitplansupportedbycontributionsonlyfromMIT,andtheSupplemental401(k)Plan—adefined-contribution401(k)plan.Thislattercomponentreceivesmembercontributions,whicharematchedbyMIT.WenowdescribeelementsofthisPlanpriortothechangesthatwereinitiatedonJanuary1,1999.ThenwehighlightthesechangesandthosemadeinSpring1999.TheMITRetirementPlancoversallemployees,facultyandstaff,attheInstitutewhoworkatleast1/2time.ItistheproductofamergerofseparatePlansin1989:TheRetirementPlanforStaffMembers(RPSM)andtheRetirementPlanforEmployees(RPE).SomeofthedetailsofthecurrentPlanaretheresultofthecarryoveroffeaturesandrestrictionsfromthisearliersystem.WhenthePlanwasmodifiedin1989,individualaccountsfromthepriorRPSMweremaintainedasRPSM401(k)accountsandsegregatedfromtheSupplemental401(k)accountsestablishedunderthenewPlan.NofurthercontributionshavebeenmadetotheseRPSMaccountsbuttheycontinuetoappreciateandformpartoftheoveralldefined-contributionassetsforfacultyandstaffhiredbefore1989.FacultyandstaffjoiningMITafter1989donothaveRPSMaccounts.Atthetimeofretirement,thecombinationoftheSupplemental401(k)PlanandtheRPSMaccountswillprovidemostofthetotalretirementbenefitofalong-termfacultymemberwhohascontributedthemaximumamountoverhisorhercareer.ThebenefitfromtheBasicPlanisexpressedasthevalueofasingle-lifeannuitypayableatretirement,althoughtheparticipantmayactuallychoosefromavarietyofannuityoptionsofequivalentvalue.Thisannuitymayincrease,afterretirement,throughtheapplicationoftriennialcostoflivingadjustments.TheInstitutefundsthisbenefitthroughperiodiccontributionstotheBenefitsFundoftheMITRP'sTrust.BasicPlanbenefitsareinsuredbythePensionBenefitGuarantyCorporation(PBGC).ThevalueatretirementofanaccountintheSupplemental401(k)Plan(wherethecontributionsaredefined,butnotthebenefits)dependsonanumberoffactors.Allparticipantshavehadtheopportunitytovoluntarilycontribute1%-5%ofsalarytothe


Supplemental401(k)Plan.TheInstitutematchesthesecontributionsdollar-for-dollar.ThisaccounthasbeeninvestedintheFixedandVariableFundsasdirectedbytheparticipant.AccountsaccumulatedundertheformerRPSMarealsoinvestedintheFixedandVariableFunds.Thisplanconsistedofthe10%contributionfromMITplusarequired5%contributionfromtheparticipant.Underthepre-1999rules,onehalfofthecontributionfromMITplusitsinvestmentreturnshavehadtobeannuitizeduponretirement.Thus,thetotalvalueofanindividual'saccountintheSupplemental401(k)PlanandintheRPSM(ifany)atretirementdependsonthemember'scontributiontothePlan,theMITcontribution,thechoicesmadebytheparticipantbetweeninvestmentsintheFixedandVariableFunds,andtheperformanceofthefinancialmarketswherethefundsareinvested.TheInstitutehasprovidedrecordkeepingservicesandthetrusteeshaveguidedtheinvestmentpolicy,eventhoughalmostallday-to-dayinvestmentdecisionsweremadebyoutsidefirms.TheInstitutehaspickedupallofthecostsassociatedwiththePlan,suchasinvestment,custodial,legal,andactuarialfees.ThenormalpracticeelsewhereistodeductmostofthesecostsfrominvestmentreturnsasisdonebyTIAA/CREFandmanyother401(k)retirementplansand/ortochargeparticipantsafee.TheInstitutehasprovidedannuitiesforboththeBasicandSupplemental401(k)Planandhassetannuityratesbyasmoothingformulathatlimitsthemaximumincreasesordecreasestothefixedannuityinterestrateto.25%perquarter.Thissmoothingcanincreasebenefitswhenratesaredropping,butcanlowerthemwheninterestratesarerising.2.2WhyTheNeedForChange?First,certainpracticesmustbeamendedinordertopreservethetax-qualifiedstatusofthePlanandbringthePlanup-to-datewithchangesinIRSregulations.Theadvantagesofpreservingthisstatusaremany.Underatax-qualifiedplan,participantspaynotaxesonemployercontributionsuntilfundsarewithdrawn;participantsmaymakepre-taxcontributions;investmentreturnsaccumulatetax-deferred;certainlump-sumdistributionsmaybetaxedatreducedrates;andaccruedbenefitsmaynotbeattachedincaseofbankruptcy.Second,someparticipantshaveviewedtheinvestmentoptionsintheSupplemental401(k)PlanandtheRPSMasbeingverylimited,withonlyachoicebetweentheFixedandVariableFundandrestrictionsonthemovementoffundsbetweenthem.Agreaterlistofoptionswouldallowparticipantstobuildinvestmentportfoliossuitabletomeettheirparticularneeds.Finally,theservicingofthe401(k)portionofthePlanhasgottenbeyondthecapacityofMITtomanagetothestandardssetbymodernfinancial-servicesinstitutions.Thisincludes


providingresponsiverecordkeeping,managingincreasedinvestmentandwithdrawaloptions,providingup-to-dateaccountvaluation,supplyingadditionalservicetomembers,expandingannuityofferings,andinsuringcontinualIRSqualificationofthePlanwiththefrequentchangesinregulations.Thequestionalsoarisesastowhether401(k)recordkeepingshouldbepartofthecoremissionofMIT.TheBenefitsOffice,inconjunctionwiththeStrategicReviewofBenefitsCommitteeandtheCommitteeonFacultyAdministration,developedproposalstodealwiththeseandotherissues.SomeoftheproposedchangeswererequiredtokeepthePlantax-qualified,andwereinstitutedonJanuary1,1999;othersoccurredinthespringof1999.TheSubcommitteehasreviewedthesechangesandweoutlinethembelowwithourcomments.2.3HighlightsofChangestothePlanSomechangesdealwiththerequestformoreinvestmentoptionsandbetterservices.ThisisaccomplishedbyoutsourcingtheadministrationandmanagementofthePlantoafinancialservicesinstitution,FidelityInvestments,andallowingPlanparticipantsamuchwiderchoiceofinvestmentoptions.Initsdecisiontooutsourcethemanagementandadministrationofindividualaccounts,MIThelddiscussionswithseveraloutsidefinancialserviceorganizations.WehaveexaminedtherequirementsestablishedbyMITandtheproposalsreceivedfromseveralvendors.TheSubcommitteealsoreviewedtheprocessthatwasusedtoselectFidelityInvestmentsastheoutsidevendorforthe401(k)portionofthePlanandwearecomfortablewiththeprocess.Thischangewillbeseenasabenefitbymanywhohaveaskedformoreinvestmentoptions,butmaybeofconcerntootherswhohaveneitherthetime,theexperience,northeinclinationtoenterintomoredirectmanagementoftheirretirementassets.Toaccommodatetheseconcerns,theinvestmentoptionswillincludethecontinuationofthecurrentFixedandVariableFunds.ThecurrentassetsoftheMITFixedandVariableFundsweretransferredtoFidelityInvestmentsfortheirday-to-daymanagementonApril1,1999.TheinvestmentguidelinesoftheFixedandVariableFundswillbesetbyanMIToversightcommittee,followingthecurrentphilosophyofthesefunds,butspecificinvestmentdecisionswillnowbemadebyFidelityInvestments.TheseparticularfundswillbemanagedasmutualfundsbutofferedonlytoMITRPparticipants.Theyhavebeenreferredtoas"cloned"fundsinsomeMITliteraturebecausetheyaredesignedtomatchtheearlierFixedandVariableFundsinriskandreturn.AlthoughtheFixedFundwillinitiallycontaintheinvestmentvehiclesthatcurrentlymakeuptheMITFixedFund,andtheinvestmentpolicyoversightwillbeprovidedbyMIT,itdiffersfromthepreviousMITFixedFundinthatitwillalwaysbevaluedatmarket.Thus,duringperiodsofrapidgrowth,itwillshowthefullmarketincrease.Conversely,duringmarketretrenchments,itsvaluecandecrease.InadditiontotheFixedandVariableFunds,participantswillhaveaccesstoavarietyofmutualfundsacrosswhichtoallocatetheir401(k)assets.Eachofthesefundsbearsa


specificexpenseratiochargethatissetbyFidelityorotherprovider,insomecasesafternegotiationwithMIT.Differentfundsimposedifferentexpensesforfundmanagement,whichencompassesmanagementandtradingexpenses,investmentadvisoryservicefees,andadvertising.Theexpensesoftheindividualfundaccountswillbetakenoutofgrossinvestmentreturns,sothatparticipantaccountsreceiveinvestmentreturnsnetofthesefundexpenses.SincethebulkoftheinvestmentfeesontheFixedandVariableFundshavetodatebeenpaidbyMIT,chargingthesefeestotheaccountsinthefuturewilladverselyaffectaccountbalancesforallparticipantsincludingretiredfacultywhohaveaccountsinthesefunds.However,theincreasedoptiontochooseotherfundswithpossiblyhigherreturnsmaymakeupforthislossinthemindsofmanyparticipants.Theannualexpenseratiosfortheuniverseofmutualfundsaretypicallyintherange.1%to1.5%ofassetsdependingontheinvestmentoptionselected(seeAppendix2foratableofannualexpenseratiosforvariousinvestmentoptions).Becauseofimprovedrecordkeepingandeconomiesofscale,themovetoanoutsidefinancial-servicesvendoralsoofferstheopportunityforincreasedoptionsforwithdrawalfromparticipantaccountsatthetimeofretirement.Theseoptionswillbeprovidedatnoadditionalcostbeyondtheexpenseratioschargedfortheindividualmutualfundholdingsinaparticipant'saccount.Also,becauseofimprovedrecordkeeping,individualswillhavecontinuousup-to-dateinformationontheiraccountsthroughaccesstotheweb,bytelephone,orbyfrequentaccountmailings.Underthepre-1999Plan,annuityratesweresetbyMIT.UnderthecurrentPlan,anadditionalannuityoptionwillbeadded.MITwillnownegotiategrouprateswithanoutsidevendorforannuities,whichwillbeavailabletoparticipants.AnexpressedconcernhasbeenthatanoutsidefirmwouldnotsetannuityratesusingthesameformulathatMIThasbeenusingtosetthem,andwouldthereforesubjectretiringparticipantstogreaterriskfrominterestratefluctuations.Tomeetthisconcern,MITwillprovideretireeswithachoice,foraperiodoftimethelengthofwhichisstillunderdiscussion,betweenusinganMIT-setannuityrateoronethatMITnegotiatesatagroupratewithacommercialcarrier.Therearemanyotherproposedchanges.Somearedesignedtoenableearlyretirementbyprovidingincreasedflexibilityandincreasedbenefits.IRSregulationspermitmoreflexibilityinphasingintoretirementthanispresentinthepre-1999Plan.Bychangingthenormalretirementage(NRA)to62,andallowingretirementbenefitstobedrawnwhileworkingpart-time,thecurrentMITRPwillprovideindividualswithincreasedoptionsandincreasedbenefits.ThenexttwosectionsdescribethechangesintheMITRetirementPlaningreaterdetail.Section3dealswithchangestotheSupplemental401(k)Plan.ThechangesinPlanadministrationdescribedfortheSupplemental401(k)PlanwillalsoapplytoassetscontainedintheRPSMPlanasdiscussed.(SeeAppendix1foraglossaryofterms.)Section4dealswithchangestotheBasicPlan,thedefinedbenefitplantowhichMITisthesolecontributor.


3.ChangestotheSupplemental401(k)/RPSMPlanChangesinthe401(k)Planfallintotwocategories.Thefirstdealswiththeaccumulation,pre-retirementphase.ThesefeaturesarediscussedinSection3.1.Theseconddealswiththeoptionsforwithdrawalavailablepost-retirement.ThesearediscussedinSection3.2.3.1Changesinthe401(k)PlanPre-RetirementTherevisionstothepre-retirementfeaturesoftheSupplemental401(k)/RPSMPlanfallintotworoughcategories.OneresultsfromchangesmadeasofJanuary1,1999.AsecondsetofrevisionscamelaterwiththecompletionofthetransferofPlanassetsandmanagementtoFidelityInvestments,whichoccurredApril1,1999.Botharediscussedbelow.3.1a)IncreaseinAllowableEmployeePre-TaxContributionsEffectiveJanuary1,1999,thereisanincreaseintheamountaparticipantcancontributetotheSupplemental401(k)Plan,asapre-taxemployeecontribution.Thepre-1999maximumwas5%.AfterJanuary1,1999,anindividualwillbeabletocontributeasmuchas20%,uptoamaximumof$10,000.TheMITmatchwillremainatdollar-for-dollaronlyupto5%.3.1b)OutsourcingofFundManagementtoFidelitywithAdditionalInvestmentOfferingsInthespringof1999,anumberofadditionaloptionsbecameavailable.FidelityInvestmentsnowofferstheFixedandVariableFundswithinvestmentoversightpolicyprovidedbyMIT.Supplementingtheseoptionsisasetof8to10CoreFundsofferingavarietyofriskandreturnprofiles.TheBenefitsOfficewillsupportthesefundswithinformationalbrochuresandinvestmentanalysissoftware.Finally,forMITRPparticipantswhowishtohaveaccesstoastilllargergroupoffunds,FidelityInvestmentsoffers,withoutadditionaltransferfees,accesstoselectionsfrom21MutualFundfamiliesthroughitsFundsNet.TheMITSupplemental401(k)PlanOversightCommitteehasmadethechoiceofthecorefundsandtheBenefitsOfficehasbeennegotiatingthesetoffundstobeavailablethroughFundsNet.ThisinformationwillbeprovidedtoPlanparticipantslaterthisspring.AccesstoindividualaccountsbecameavailableonMay3,1999.Someparticipantshaveinquiredwhethersharesinindividualcompanieswillbeacceptableinvestmentvehicles.Theanswerisno.IRSrulesrequirearm'slengthtransactionsin401(k)plans.Sinceitisnotpossibletoinsurethatthereisno"interest"inaparticularstockpurchase,thisoptionwillnotbeavailabletoMITRPparticipants.Theinitialtransferofaparticipant'sretirementassetstoFidelityInvestmentscreatedtwoseparateaccounts:account#1isacombinationofallcurrentSupplemental401(k)balancesplusanyRPSMmembercontributionaccount,and50%ofanyRPSMMITcontributionaccount.Account#2istheremaining50%ofanyRPSMMITcontribution


account.Atinitiation,assetsintheseaccountswillbeinvestedinthesameproportionsoftheFixedandVariableFundastheywerepreviously.Theresultingbalanceinaccount#2maynotbepaidasalumpsumatretirement.However,therequirementthatthesefundsbeannuitizedhasbeeneased.Instead,retireeswillbeallowedtohavethisportionoftheirassetspaidinanyform(includingannuity)thatresultsinpaymentsbeingmadeininstallmentsthatcontinueatleast10years.ThestructureofthenewPlanwithitsuseofindividualaccountsthataremarked-to-marketmakesitpossibleforindividualstorolloverfundsfromcertainotherqualifiedplanssothattheirassetscanbemanagedinoneplace.Manyfacultymayfindthisanattractiveoption.Possibilitiesforrolloversincludeother401(k)plans,KEOGH's,andSEP-IRAs.However,IRSregulationscurrentlydonotallowrolloversofeither403(b)plansorTDA's.Assetsthatarerolledoverintoanindividual'saccountwillbesegregatedfromtheMITRPaccounts,andtheindividualwillbearanycostsfromarolloverfromaKeoghorIRAaccount.Althoughtheseaccountswillbesegregated,atpresentthereisnoprovisiontoallowparticipantstomakeseparateinvestmentdecisionsfortheseaccountspriortoretirement.Investmentreturnsfromaparticipant'sentiresetofaccountswillbeproratedacrosstheindividualaccounts.TheSubcommitteerecommendsthatpolicybere-examinedin2000.3.1c)TransferofInvestmentExpensestoParticipantsUnderthecurrentPlan,MIThasbornetheexpensesforthe8,700employeescurrentlyinthePlan.Inaddition,sincethereisnooptiontotreatparticipantsdifferentially,MIThasbornetheexpensesforthe5,300formeremployeeswhohavenotretiredandforwhomMITcontinuestoholdanaccount.AfterApril1,1999,allPlanparticipantswillpayinvestmentexpensesassociatedwiththeexpenseratiosoftheparticularinvestmentoptionthattheyhavechosen.MITwillbearthecostofthetransitionbetweenMITandFidelityInvestments.WiththeexceptionoffundsinvestedafterJanuary1,1999inthemoneymarketaccount,noaccountwaschargedinvestmentexpensesandreceivedgrossreturnontheassetsuntilApril1,1999.MITwillcontinuetopaytheMIT-basedexpensesofoperatingthePlan,suchasthecommunicationandcounselingthatindividualsreceivefromtheBenefitsOfficeandanyon-campusrecordkeeping.WiththetransferoffundstoFidelityInvestments,participantsreceivenetinvestmentreturns,asoccursforatraditionalmutualfundinvestmentaccount.Expenseratiosare:fortheFixedFund,anannualexpenseratioof.22%ofassets;fortheVariableFund,anexpenseratioof.28%ofassets.Otherchoiceswillbearotherexpenseratios.OneoptionavailabletoMITparticipantsasacorefundisaccesstotheFidelityinstitutionalS&P500Indexfundatanexpenseratioof.1%ofassets,roughly50%belowthebestrateavailabletoindividualinvestors.AlsoavailablethroughFundsNetisaccesstotheVanguardInstitutionalIndexFund,atanexpenseratioof.06%.(SeeAppendix2foratableofAnnualExpenseRatiosforVariousMutualFunds).


TheSubcommitteehasconsideredseveralissuesinreviewingthetransferofMITRPinvestmentexpensestoparticipants.Withthemovetoparticipantchoiceofinvestmentoptions,eachaccountwillbearaspecificcost,dependingonoptionschosenbytheparticipant.IthasbeensuggestedbysomethatMITcontinuetopaythecostsoftheFixedandVariableFunds,expectingindividualstopaythecostsoftheotheroptionstheychoose.AnothersuggestionwasforMITtofundanequivalentportionoftheexpensesforallfunds,ortopayaportionofthecostsforallparticipantsintheMITRPforatransitionperiod.Alternatively,MITcouldtransferadditionalfundstoindividualaccountsasanoffsetagainstfutureexpenses.ThesesuggestionsmustbeviewedinlightofthefactthatthePlan'sinvestmentoptionswillincludemutualfunds(andotherfundsthatusethemutualmodelforfundingexpenses).Mutualfundaccountingsystemsarestructuredtodeductexpensesdaily,sothatnetreturnsarereported.Inaddition,thedailydeductingofexpensesisoutlinedinamutualfund'sprospectus,andmustapplytoallaccountholdersasoutlinedbytheprospectus.ThismakesitvirtuallyimpossibletotrackgrossreturnsforMITparticipants.TherehasbeenashiftawayfrombeingabletorecoverpensionplancostfromtheportionoftheEmployeeBenefitPoolsupportedbyfederalcontracts.AndwiththemovetosupportingfullfacultysalariesonInstitutefunds,MITnowpaysamuchgreatershareoftheemployeebenefitexpensesforfacultyoutofitsgeneralbudget.WealsorecognizethatthefacultywillbenefitinotherwaysfromthecostsavingstoMITifPlanparticipantspayinvestmentcosts,becausethechangewillfreeupdiscretionaryfundsforeducationalandresearchpurposes.Thus,theSubcommitteebelievesthatthiscost-shiftingshouldnotbeconsideredinisolation,butevaluatedinthecontextofallchanges,someofwhichincreasecoststoMIT,andmoregenerallyintermsoftheoverallretirementbenefitspackage.Forallofthesereasons,webelievethisisareasonableproposal.3.1d)ChangeinFixedFundAccountingtoMarketValuePriorto1999,aparticipant'sFixedFundaccountvaluewasexpressedasits"bookvalue,"definedasthesumofMITandindividualcontributionsplusinterestanddividendsandaportionofnetcapitalgainsexperiencedbytheFixedFund.Theaggregateofbookvaluescoulddifferfromtheaggregatemarketvalueofthefund."Marketvalue"isdefinedasthesumofMITandindividualcontributionsplusinterestanddividendsandallnetcapitalgainsexperiencedbytheFixedFund.Atthetimeofpaymentoftheparticipant'saccount,suchasatretirement,ifthemarketvalueofthefundexceedstheaggregateofbookvalues,thebookvalueofthefundwasincreasedbya"marketvalueadjustment"whichmultipliedthebookvalueofanindividualaccountbytheratioofaggregatemarketvaluetotheaggregateofbookvalues.Atalltimessincethisbookvalue-marketvalueprocedurehasbeenused,themarketvaluehasexceededthebookvalue.Theamountbywhichmarketvaluehasexceededbookvalueisthe"marketvalueadjustment."Thepossibilityofcreditingabenefitatavalueotherthantheaccount'smarketvalueviolatesIRSqualificationrequirements.Therefore,theconceptofbookvalueandtheassociatedsmoothingproceduremustbeabandoned.Asaresult,allFixedFundaccountsreceivedamarket-valueadjustmentbasedonreturnsthroughDec.31,1998.Thesefunds


wereallocatedinproportiontotheassetvalueoftheindividualaccounts,andonJanuary1,1999allparticipantFixedFundaccountsweregiventhemarketvalueadjustmentof17.8%.Thisisequivalenttoallocatingthefundsasifeveryonewereretiringonthisdate.Fromnowon,theaccountswillbeatmarketvalueeachday.Somefacultyhaveraisedthequestionofwhetherthismethodofallocatingtheunallocatedfundsisfair.Afterconsiderabledeliberation,theSubcommitteehasconcludedtheprocessusedwasappropriate.TheSubcommittee'sreasoningisdescribedinAppendix3.3.1e)AdditionofImmediateVestingAsofJanuary1,1999,vestingisimmediate.Thatis,aparticipantwillimmediatelyhavearightnotonlytohis/herowncontributions,butalsototheMITcontributionstotheiraccount.Thisprovidesanobviousfinancialbenefittonewparticipants.Also,underthischange,thePlanwillnolongerberequiredtotestpre-taxcontributionstoinsurethathigh-incomeindividualsarenotoverlyweightedinthePlan.Therefore,therewillnolongerbethepossibility—ashasoccurred—ofcutbacksofthecontributionsofhighlycompensatedparticipants.(TheIRSdefineshighlycompensatedindividualsasthosewithsalariesabove$80,000for1999.)3.1f)EliminationofPost-TaxContributionsonJanuary1,2000UnderthecurrentPlan,contributionstotheSupplemental401(k)Plancanbeeitheronapre-taxorpost-taxbasis.Pre-taxmeansthatyoudonotpayfederalorstateincometaxesontheamountscontributedbutdopaythesetaxeswhenthecontributionsarewithdrawn.Post-taxmeansthatyoudopayfederalandstatetaxesonamountscontributed,butnotwhenthecontributionsarewithdrawn.BecauseMITacceptedpost-taxcontributions,MITwasrequiredtotestcontributionsacrossthePlantoinsurethathighercompensatedindividualswerenotover-representedinthePlansbenefits.Becauseofthecomplexity,expense,andeffectsofthisrequirement,MITproposestoeliminatepost-taxcontributionstotheMITRPasofJanuary1,2000.Asaresultofthischange,MITwillnolongerberequiredtocarryouttesting.ManyparticipantsinthePlanhavetakenadvantageofthisoptionthroughMITprovidedTDAsandwillneedtoconsiderwhattheeliminationofthepost-taxoptionwillmeanforthem.Post-taxtax-shelteredannuities(TSA)willstillbeavailablefromoutsideproviders(TIAA,forexample,sellsthem).LikeTDAs,aTSAwillalsoshelterearningsfromtaxationuntilwithdrawal.Thiswouldallowindividualstohavethemaximumearningsdeferredfromtaxation.TheBenefitsOfficewillbecontactingallparticipantswhocurrentlycontributepost-taxtotheMITRPtodiscusstheirindividualneeds.3.1g)Loansavailable(withIRSrestrictions)LoanswillbeavailableunderthenewPlanforpurposessuchasthepurchaseofahome,educationormedicalexpenses.ThisshouldencourageyoungerparticipantstoputassetsintothePlanknowingthattheywillbeavailableunderIRSrestrictionsforotheruses.Undertheserules,aloanwillbeavailablefrom$1,000upto1/2ofthevalueoftheaccount,nottoexceedaloanof$50,000.Theloanwillhavea5-yearpaybackperiodandpayroll


deductionswillbeusedforrepayment.Alongerperiodforhomepurchasewillbeavailable.Spousalconsentwillberequiredtoobtainaloanfrompensionassets.Paymentofareasonableinterestrateisrequiredontheseloans.3.1h)OptionsInitiatedonJanuary1,1999Asanintermediatesteptowardsincreasedflexibility,onJanuary1,1999,theMITRPintroducedtwooptionsforPlanparticipants:anewinvestmentoption,andtheabilitytotransferfundsamongaccounts.WhenthetransferoffundstoFidelitywascompleted,thesewerefoldedintothesetofincreasedoptions.TheEmployeeRetirementIncomeSecurityAct(ERISA)givesadvantagestoretirementplansthathaveatleastthreeinvestmentoptions.TheMITRPmetthiscriteriononJanuary1,1999byofferingamoneymarketfundthroughFidelityInvestmentsintowhichparticipantscanshiftaccountassets.Themoneymarketfundbearsanexpenseratioof.42%ofassets,thusreportingreturnsnetofthischarge.ERISAalsogivesadvantagestoretirementplansthatofferparticipantstheopportunitytotransferassetsamongallavailableinvestmentoptions,atleastquarterly.Previously,theMITRetirementPlanrestrictedtransfersofassetsbetweentheFixedandtheVariableFunds.AsofJanuary1,1999,aparticipantmaytransferfundsmonthlyamongthreefunds:Fixed,Variableandthenewmoneymarketfundwithoutanyrestrictionsonage.AfterMay1999,withthenewaccesstoandinformationaboutindividualaccounts,dailytransfersarepermittedacrossalloftheoptions.3.2401(k)Post-RetirementWithdrawals,Annuities,andLumpSumDistributionsWiththemoveofparticipantaccountstoanoutsidevendor,FidelityInvestments,thereisasignificantincreaseinthepost-retirementwithdrawaloptionsthatarenowavailabletoPlanparticipants.Formanyfaculty,pensionassetsrepresentanimportantpartoftheirtotalassets.Taxandestateplanningisacomplexareathateachindividualmustconsiderbaseduponhis/hersituationanditisnotthechargeofthisSubcommitteetodiscusstheseissues.TheSubcommitteehasexploredwhethertheMITRetirementPlanallowsthefullrangeofpayoutflexibility,withitspotentialfortaxandestateplanning,thatispermittedunderIRSregulationsgoverning401(k)plans.AlsowehaveconsideredwhetherthecommunicationmaterialavailabletoPlanparticipantslaysouttheseoptionsinaclearmanner.3.2a)MIT401(k)WithdrawalOptionsParticipantsdonotbegindrawingassetsfromtheMITRPuntiltheyretire;nomatteratwhatagethisoccurs.ThisisincontrasttoIRAplans,whichrequireminimumdistributionpaymentstobeginatage701/2.Planparticipantswhoretirebeforeage701/2,havetheoptiontotakePlanassets,eitherinpartorintotal,aslumpsumdistributions,scheduledorflexiblepayments,rolloversintovariousIRAsorthroughpurchaseofvariousannuitycontractsortoleaveallassetsinthePlan.Oncetheretireeisoverage701/2,anelectionof


amethodtobeginminimumdistributionpaymentsmustbemade.Thechoiceoftheparticipant'sbeneficiarycandeterminethesizeoftheminimumdistributionpaymentstotheparticipant.TwoprovisionsarespecifictotheMITRPSupplemental401(k)Plan,andarenotrequiredbyall401(k)plans.First,theMITRPrequiresthat50%oftheMITcontributiontotheMITRPSMremaininthePlanorbetransferredtoanannuityandthattheseassetsbepaidoutoveraperiodofatleast10years.Thus,thisportionisnotavailableasalumpsumpaymentorforrolloverintoanIRA.Second,theMIT401(k)Planrequiresspousalconsentforanypayoutplanthatresultsinlessthan50%ofPlanbenefitsbeingavailabletothespouse.However,withspousalconsent,itispossibleuponretirement,torolloverPlanassets,exclusiveof50%oftheMITcontributiontotheRPSM,intoanIRA.ThegoverningIRSframeworkforthedistributionofretirementplanassetsofIRAsisdescribedinIRSpublication590.Manyparticipantswillfindthisoptionattractive.Webelievethat,ingeneral,theprovisionsgoverningtheMITRPSupplemental401(k)PlanprovidethecompleteflexibilityofwithdrawaloptionsforPlanparticipantsandtheirbeneficiariesthatareallowedbyIRSregulationsgoverning401(k)plans.However,thereisatpresentnodocumentthatlaysoutPlanoptionsforwithdrawalinaclearandcomprehensivemanner.Appendix5presentswithdrawaloptionsforboththeMITRP401(k)PlanandthealternativeIRAoptionsforpaymentstoparticipantsandbeneficiaries.3.2b)ProvisionforEarlyDistributionofPlanAssetsUnderthenewPlan,distributionofPlanassetswillbeavailabletoanindividualwhoisatleast591/2andwhoarrangestoworklessthan50%time.3.2c)AdditionofNewAnnuityOptionsAnannuityisaspecificcontractforpayoutofalloraportionofplanassets.Itincludesachoiceofeitherfixedpayments,orvariablepaymentsthatdependontheinvestmentperformanceoftheannuitizedassets.Itcanincludeaspecifictimeforpaymentsorprovidepaymentsforlife.Itcanincludeaspecificbeneficiaryandadditionalspecifications.Alloftheseoptionsaffectthescheduleofbenefitpaymentsundertheannuitycontract.InformationaboutannuityoptionsisavailablefromtheBenefitsOffice.Onceanannuitycontracthasbeendefined,itcannotbechanged.UnderthenewPlan,MITwillcontinuetoofferitstraditionalannuityforthedefined-benefitportionofthePlan,MITwillcontinuetotakeSupplemental401(k)/RPSMmoneybackintotheBenefitsFundtoprovideanannuityforthedefinedcontributionportionofthePlanusingthesameinterestrateassumptionsandmortalitytablesashavebeenusedinthepast.MITwillalsoofferannuitiesatnegotiatedgroupratesfromoutsidecarrierstoprovideachoice.Foritsannuities,MIT'sinterestrateisthetrailing12monthaveragerateof10YearTreasurynotesdeterminedquarterlylimitednottogoupordownmorethanone-quarterofonepercentfromtherateusedintheprecedingquarter,sothatinterest


ratelagsmarketincreasesanddecreases..Whilefacultywhobenefitedfromslowinginterestratedeclinesmayhavebeenpleased,thosewhowerehurtbyslowinginterestrateincreasesexpresseddissatisfaction.IfMITcontinuestoofferthechoicebetweenanannuityfromMITandfromanoutsidecarrier,thedifferenceininterestratesofferedbyMITandtheoutsidecarriercouldcreateanadditionalexpensetoMIT,sinceparticipantswilllikelymakethechoiceofanMITannuityonlywhentheMITrateismorefavorablethanthecommercialrate.TheissueofMITcontinuingtoofferannuitiesiscurrentlybeingre-examined.3.2d)DeathbenefitsSincePlanassetscanrepresentanimportantpartofthetotalassetsofPlanparticipants,itisimportantthatparticipantsgivesomethoughttohowtheseassetswillbepassedontobeneficiariesatthetimeofdeath.Withspousalconsentinthecaseofmarriedparticipants,participantshaveconsiderableflexibilityindesignatingbeneficiariestoreceivePlanassetsatthetimeofdeath.PayoutofPlanassetsupondeathdependsuponthechoiceofbeneficiary(spouse/non-spouseandage)andwhetherminimumdistributionpaymentshavebegun.Thechoiceofbeneficiariesnotonlyaffectsthedispositionofassetafterdeath;itcandeterminethesizeofminimumdistributionpaymentstotheparticipantduringretirement.Paymentsunderanannuitycontractfollowthetermsofthecontract.PlandocumentsandIRSregulationsgoverndistributionofundistributednon-annuitizedPlanassetstobeneficiaries.SpousalbeneficiariesareallowedtorolloverlumpsumdistributionsintospousalIRAsortocontinuetoreceivePlandistributions.Non-spousebeneficiariesofPlanparticipantswhodiebeforeretirementorbeforeminimumdistributionpaymentshavebegun,receiveasinglelumpsumpayment.UndercurrentIRSregulations,theymayleavetheassetsinthePlanforfiveyears,orforadesignatedbeneficiary,planassetsmaybedistributedovertheexpectedlifeofthebeneficiary.However,noMITAnnuitywillbeavailableforthisdistribution.Non-spousebeneficiariesofPlanparticipantswhohavebegunminimumdistributionpaymentscontinuethepaymentschedulesetupbytheparticipant.(SeeAppendix5.)4.ChangesEffectiveJanuary1,1999inTheBasicPlanThenoncontributory,definedbenefitportionofthePlanisreferredtoastheBasicPlan.Itwascreatedin1989withthemergeroftheRPEandcertainbenefitsfromtheRPSM.MITwillcontinuetopayalloftheexpensesassociatedwiththeBasicPlan.UndertheBasicPlan,aretireereceivesthelargeroftheannuitycalculatedusingtwodifferentmethodsofcalculation.(ThismaximumapproachisaconsequenceoftheearliermergingoftwoseparatePlans.)Onecalculationisanannuityequalto1.65%ofthesumofsalariesreceivedinallyearsbetween1989andthedateofretirement,actuariallyadjustedtoprovidethefullbenefitatnormalretirementage(NRA).Thesecondcalculationistheannuitythatcouldbepurchased(givenannuitypricingatthetimeofretirement),bytheamountinanotionalorshadowaccount,whichiscreditedwith5%ofsalaryeachmonth


andearnsanotionalrateofreturn.Todate,the1.65%calculationhasyieldedlargerretirementbenefitsforalmostallretireessincethismaximumapproachwasinitiated.However,forthosewhoweremembersoftheRPSM,thereisanalternative.AlthoughaQualifiedSpouseBenefit(QSB)isavailabletoallRPSM(pre-1989Plan)membersunderboththe1.65%andthe5%accountmethods,theQSBforthe5%accountishigher.ThustoreceivethehigherQSB,anRPSMparticipantmustelecttheannuityfromthe5%account,evenifthatresultsinlowerpaymentsthanthatfromthe1.65%calculation.4.1Pre-RetirementChanges4.1a)AccumulationofBenefitsforthe5%andthe1.65%AccountsInthepast,theinvestmentgrowthoftheFixedFundwasusedtodeterminethegrowthofthenotional5%account.(ThisaccountalsoreceivedamarketvalueadjustmentonDecember31,1998inthesamewayastheFixedFundasdescribedabove.)UnderthecurrentIRSregulations,thecontinueduseoftheFixedFundappreciation,asitismanagedbyMIT,isnotanoptionsinceIRSnowrequiresanarm's-lengthmethodtocomputeaccountgrowth.Therefore,tocomputethegrowthofthe5%accountafterJanuary1,1999,MITmustselectsomemarketindexwhosegrowthisoutsidethecontrolofMIT.Toincreasethenotionalbalanceinthe5%accounteachmonth,MIThaschosentousethefollowingmethod.Thefirststepistocalculatethereturnovertheprevious12monthsinanindexbased75%ontheLehmanBondIndexand25%ontheRussell3000stockindex.Thisindexwaschosenbecauseitapproximatestheinvestmentpracticeofthefixedfund,thereturnonwhichwasusedinthepast.Thesecondstepistoapplyafloorof0%andaceilingof15%tothisannualreturn.Thentheannualrateofreturnisconvertedintoamonthlyrateofreturnandappliedtothebalancesinthe5%notionalaccounts.AfloorofatleastzeroisrequiredbytheIRSforadefinedbenefitplansuchastheBasicPlan.Inthepresenceofafloor,andwithoutacatch-upprocedure,aceilingtobalancethecostsforMITseemsappropriate.TheSubcommitteefindsthatthismethodisreasonable.ThisissueisfurtherdiscussedinAppendix4.However,ifweshouldhaveaperiodofprolongedmoderateinflation,itislikelythattherewouldbemoretrimmingofhighreturnsthanoflowonesanditwouldbeappropriateforMITtorevisitthe15%ceilingandraiseit,atleasttemporarily,ormakesomeotheradjustmentsuchastheintroductionofacatch-upprovision.Continuedmonitoringoftheworkingsofthissystemisanimportantpartoftheprovisionofbenefits.TheSubcommitteeisalsoconcernedthatthepresentmethodofcalculatingthe1.65%Basicbenefitissubjecttoriskforparticipantsintheeventofsignificantinflation.Wehaveexaminedthisissue(Appendix4)andconcludedthatpastcontributionsinthe1.65%accountareerodedbyinflationbothforalongperiodofmoderateinflationaswellasashortperiodofhighinflation.ItisnottheplaceofthisSubcommitteetorecommendaparticularchangeinthiselement,whichisnotbeingchangedotherwise.However,weurgetheMITadministrationtoexamineandpossiblyredesignthe1.65%accounts.


4.1b)BenefitsAccruedpastNormalRetirementAge(NRA)Toavoidagediscrimination,benefitsmustcontinuetobeearnedforparticipantswhoworkpastnormalretirementage.Thus,duringone'sworkinglifeatMIT,both5%ofsalaryandinterestonthe5%accountwillcontinuetobecredited.Forthe1.65%accountbenefit,twocalculationswillbedone.Thefirstistheannualpaymentthatwouldbepaidwiththeparticipant'saccountcreditedwiththeadditional1.65%ofsalaryfortheyearsworkedafterNRAwithnoactuarialbenefitforstartingthepaymentsatanagepasttheNRA.ThesecondcalculationisthebenefitthatwouldbepaidifthesalarycontributionsuptotheNRAwereusedtofundanannuitystartingatanagebeyondNRA,thatispaymentsthatareincreasedbyanactuarialadjustment.UnderthePlan,theparticipantreceivesthegreaterofthebenefitfromthesetwocalculations.Thus,ifaparticipantwhoretirespastNRAreceivesbenefitpaymentsthatareincreasedactuariallytoreflectalaterstartingdate,theywillnotalsoreceivethebenefitofthe1.65%oftheirsalaryaccumulationfortheyearsthattheyworkedbeyondNRA.Ontheotherhand,ifthepaymentscalculatedbycreditingtheparticipantsaccountfor1.65%ofsalaryforyearsworkedbeyondNRAarelarger,theywillnotalsoreceivetheactuarialcreditforthelaterstartoftheirannuitypayments.4.1c)Pre-RetirementRPEUnderthepre-1999Plan,littleornoRPEbenefitswerepayabletothebeneficiariesofunmarriedRPEparticipantswhodiepriortobeginningannuitypayments.EffectiveJanuary1,1999,theentireRPEbenefitsofunmarriedparticipantsarepayabletotheirbeneficiaries,asasinglelumpsumorasannuitypayments.4.2Post-RetirementChanges4.2a)ChangingoftheNormalRetirementAgefortheBasicPlanfrom65to62Underthepre-1999MITPensionPlan,thenormalretirementdatewasJuly1stfollowingthe65thbirthday.Anindividualretiringonthisdatewhoisentitledtoreceivethe1.65%benefitreceivedthefullsumof1.65%ofsalaryasanannuity.ActuarialadjustmentsweremadeforindividualswhochosetoretireearlierthantheNormalRetirementAge(NRA).TheExecutiveCommitteeoftheCorporationhasapprovedalimited-timechangetotheNormalRetirementAge(NRA)fortheBasicPlanfrom65to62,effectiveJanuary1,1999andcontinuingthroughDecember31,2003.Theyalsobackdatedthecalculationofthe1.65%pensionbenefitwithanNRAof62to1989sothatbenefitsearnedsince1989haveaneffectiveNRAof62.ThischangewillberevisitedbeforetheendofthefifthyeartoascertainwhethertheassetsofthePlancontinuetosupportthedecreaseinnormalretirementageto62,andtodetermineifthechangehasresultedinanincreaseinfacultyretirement.Asaresultofthischange,participantsmayelecttoretireatage62andreceiveannuitybenefitpaymentsfromtheaccumulationintheir1.65%accountsince1989withoutthe


currentreductionforearlypayment.Or,ifparticipantselecttoretirebeforeage62,thereductionforearlyretirementwillbelessthanwouldbethecaseifthenormalretirementagewere65.Finally,forthosewhoretireafterage62,twocalculationsofthebenefitwillbedoneandthelargerofthetwowillbepaidtotheparticipantasdiscussedinsection4.1b.Thebenefitunderthe5%accountisnotaffectedbythechangeinNRA.Thedecreaseinnormalretirementagefromage65toage62addsapermanentincreasetoallbenefitsearnedsincetheBasicPlanbeganonJuly1,1989(January1,1990forsomeunionmembers)andtoallbenefitsthatwillbeearnedaslongastheNRAof62isinplace.Ifthenormalretirementagerisesbackto65afterDecember31,2003,thehigheragewillapplyonlytobenefitsearnedafterDecember31,2003.Theeffectofage62normalretirementageonbenefitsearnedwhileitisineffectwillnotbelost.ForallPlanparticipantsupontheirretirement,benefitswillbethesumofthebenefitearnedduringyearswhentheNRAwas62andthatearnedwhentheNRAwas65.Thus,thischangeincreasespermanentlytheBasicPlanbenefitforallparticipantsnomatterwhentheyretire.Thisoccursbecausethecalculationofbenefitforeachyearofemploymentwilluseanactuarialtableadjustedtoprovidethefullbenefitatthatyear'sNRA,withcorrespondingincreasesforthosewhoretirelater.Inaddition,thischangeaffectstheCost-of-LivingAdjustmentsundertheBasicPlan.AfterBasicPlanbenefitpaymentsbegin,theywillincreaseonceeverythreeyearsasdeterminedbyacost-of-livingformula.Thefirstincreaseisscheduledthreeyearsafternormalretirementage.Bydecreasingthenormalretirementagefrom65to62,thefirstcost-of-livingadjustmentforapersonwhoretiresatage62orearlierwouldbedueatage65,insteadofatage68asunderthecurrentPlan.4.2b)LumpSumPayoutUnderthepreviousMITRP,asinglelumpsumpayoutwasavailableifthevalueofthepaymentwaslessthan$10,000.UnderthecurrentPlan,asinglelumpsumpaymentwillbeavailableiftheparticipantwasemployedlessthan10years,withnodollarlimit.4.2.c)AnnuityPaymentsUnderthepreviousMITRP,anMITannuitypaymentoptionwastheonlyoptionavailableifthevalueofthepaymentwasgreaterthan$10,000.UnderthecurrentPlan,theannuityoptionisusediftheparticipantwasemployedfor10yearsormore.5.ParticipantServices5.1CommunicationsTheBenefitsOfficehascarriedoutseminarsforparticipantsontheseretirementissues,andprepareswrittenmaterialintheformofannualreportsandinformationaboutchanges.Thisefforthasbeenincreasedinordertokeepparticipantsapprisedaboutthe


changesunderwaynow.Also,detailedfunddescriptionsanddescriptionsofservicesandoptionsarebeingpreparedandwillbemailedtoparticipantsbymidtolateApril.However,ithasbeentheexperienceofourSubcommitteethatagreatdealoftimeandeffortisneeded,giventhecurrentdocumentation,tomastereventheessentialdetails,jargon,acronyms,etc.thatareneededtounderstandthePlanandtomakeintelligentindividualfinancialdecisions.OnereasonforthedifficultyisthattheInstitutelacksthewrittenmaterialthatisneededtohelpbusyfacultyandstaffmemberslearnwhattheyneedtoknowtomanagetheirretirementaffairs.Thisreportitself,isanindicationoftheproblem,intheamountofdescriptivematerialwehavehadtoincludeinordertosupportourviewofthechanges.ItisourviewthatinterestsoffacultyandstaffhavebeenwellservedbytheMITAdministration,inthewayithasmanagedthePlan.Perhapslackoffullunderstandingofitsdetailswasnotsocriticalintheyearswhenindividualchoicewaslimited.Butnowtherearemoreoptionsintermsofbothinvestmentchoicesandchoicesabouttheforminwhichtotakebenefits.Withtheexpandedoptions,itisimportantforanindividualtounderstandtheconceptoftherisksassociatedwithinvestingaswellastheriskofinflationandtounderstandthebasicsofinvestingandassetallocationsothevalueofmaterialcarefullycraftedtoeducateparticipantsisgreatlyincreased.ThiswillbethecontinuingfocusoftheeducationalprogramsandresourcesthatwillbemadeavailabletotheMITcommunitywiththeassistanceofresourcesthatwillbeforthcomingfromFidelityandothers.Similarly,withincreasedoptionstotakelumpsumsandtochooseamongannuitiesandscheduledpaymentsindifferentforms,itisimportantforparticipantstounderstandthebenefitsandlimitationsfromannuitizationandthedifferencesacrossdifferentkindsofannuities.Weneedtodevoteresourcestoensuringthatthosemakingthesechoiceshavethebenefitofagoodeducationalprogram.TheincreasedoptionsforPlanparticipantswithinthe401(k)frameworkrequiresthatincreasedinformationbeavailable.Thereisafundamentaldilemmainprovidingpreciseinformationabout401(k)plansascontrastedwithIRAandKeoghplans.ForIRAsandKeoghplans,thegoverningplanregulationsanddocumentsarewelldefined.SinceindividualshavetotaldiscretiontochangevendorsfortheirIRAandKeoghassets,vendorshaveacompetitivereasontoprovideclearandpreciseinformationtoplanparticipants.Ifparticipantsaredissatisfiedwiththisinformationorwithfeaturesoftheirplans,theyarefreetoimmediatelymovetheirassets.Withrespectto401(k)plans,thesituationismorecomplex.401(k)plansareemployer-sponsoredwithinaframeworkofIRSlawandregulation.401(k)plansarenotuniform,anddifferentemployershavedifferentprovisions.Thus,thereisnotasinglesetofplandescriptionsandreferencematerialsavailablefor401(k)planswhichparticipantscanaccessoutsideoftheirplanadministrators.Outsidefinancialservicevendorsdealwiththeinstitutionandnotwiththeindividual.Therefore,financialserviceinstitutionshavelessincentivetoprovideclearandpreciseinformationtoplanparticipantsabouttheiroptions.WefeelthatthecurrentinformationavailablewhichdescribestheMITRPSupplemental401(k)Plan,isnotadequate,andwerecommendthattheBenefitsOfficeandFidelitywork


todevelopaPlandocumentforparticipantsthathasthelevelofclarityandprecisionthatistypicallyavailabletodescribeIRAs.5.2CounselingInthepast,theInstitutehasguidedtheinvestmentpolicyforPlanassets,eventhoughalmostallday-to-dayinvestmentdecisionsweremadebyoutsidefirms.Consequently,theInstituteassumedfiduciaryresponsibilityfortheriskofavoidableunsatisfactoryperformance.AfterJanuary1,1999eachmemberoftheMITRetirementPlanisindividuallyresponsibleforthemanagementofhis/herSupplemental401(k)Planassets.TheBenefitsOfficeandFidelityInvestmentswillprovideinformationconcerninginvestmentrisksandreturns,butwillnotprovideinvestmentadvice.FidelityInvestmentshasmadeavailableamoneymarketfundaswellastwofunds,theFixedFundandtheVariableFundwhichareintendedtocontinuetheinvestmentstrategythattheTreasurer'sOfficeemployedinthepast,inexercisingitsfiduciaryresponsibilityforthetwofundsavailabletoparticipantsintheSupplemental401(k)Plan.Theyareintendedasinvestmentvehiclesforindividualswhoarenotexperiencedinvestors,andwhohavebeensatisfiedwiththepastperformanceofthefundsmanagedbytheInstitute.EachparticipantmustdecidewhethertheseClonedFundsaresuitableinvestmentvehiclesforthelong-termfuture.Thepossibilitiesforinvestmentofparticipants'fundsarevast.BeyondthemanyadditionalmutualfundsthatwillbeavailablethroughFidelityInvestmentsafterMay1999,theestablishmentofabrokerageaccountbyamember,willpermitaccesstoanylistedmutualfundaswellastosecuritiesissuedbytheUnitedStatesTreasury.(Asmentionedin3.1b,purchaseofindividualstocksisnotpermitted.)Individualswhoarenotexperiencedinvestorsshouldseekprofessionaladviceconcerningappropriateinvestmentassetallocations.TheBenefitsOfficewillhaveinformationavailableontheFixedandVariableFunds,themoneymarketfund,andthe8-10corefundsthathavebeenselectedbytheMITSupplemental401(k)PlanOversightCommittee.Atsomelatertime,Fidelitywillprovideasoftwarepackage,calledPortfolioPlanner,whichwillbeavailabletoassistparticipantsinselectinganappropriatemixofinvestments.Thissoftwarepackagewillbepopulatedwithinformationaboutthecorefundstoaidindividualsinallocatingassetsacrosstherisk-rewardspectrum.Weurgeparticipantstoconsiderthespectrumofinvestmentandwithdrawaloptionsnowavailableand,iftheyfeeluncomfortableabouttheoptions,toseekadvice.TheBenefitsOfficehastraditionallyprovidedcounselingtoparticipantsastheycontemplateretirement.Weurgeparticipantstoseekinformationaboutwithdrawaloptionsandconsidertheirpersonalsituationwellinadvanceofretirement.


Appendix1:GlossaryoftermsAnnuity:apromiseofincome,usuallyintheformofacontractthatguaranteesafixedorvariablepaymenttotherecipientusuallyatretirement.Inafixedannuity,theamountwillultimatelybepaidoutinregularinstallmentsvaryingonlywiththepayoutmethodelected.Inavariableannuity,thepayoutdependsuponthevalueoftheunderlyinginvestments.Annuitypurchaserate:theinterestrateusedtodeterminethefactorforconvertinganaccountbalancetoanannuityincome.MIT'sinterestrateisthetrailing12monthaveragerateof10YearTreasurynotesdeterminedquarterlyexceptthatitwillnevergoupordownmorethanone-quarterofonepercentfromtherateusedintheprecedingquarter.BasicPlan:theMassachusettsInstituteofTechnologyBasicRetirementPlan,adefinedbenefitplanfullyfundedbyMIT.BenefitsFund:thefundfromwhichallfixedbenefitsarepaid(includinganycostoflivingincreasesand,forcertainpeoplewhoweremembersoftheRetirementPlanforStaffMembers,thequalifiedspouseandearlyretirementsupplementbenefits.)AllBasicPlanBenefitsarepaidfromthisfund.Bookvalue:referstoFixedFundaccountbalancespriorto1999.Contributionsandcreditedearningstoaccountsareknownasthebookvalueoftheaccounts.BondIndex:aweightedaverageofthevalueofselectedbonds."Cloned"funds:atermdescribingTheFixedandVariableFundsaftertransfertoFidelityInvestmentsmanagement.Definedbenefitplan:planthatpromisestopayaspecifiedamounttoeachpersonwhoretiresafterasetnumberofyearsofservice.Definedcontributionplan:planwhosecontributionsgenerallyaredefinedbyformulaandallocatedtoindividualparticipantaccounts.Benefitsconsistoftheamountaccumulated.Generally,eachparticipantdecideshowtoinvestfromamongoptionsoffered.Benefitsconsistoftheamountaccumulatedineachparticipant'saccount.ERISA:EmployeeRetirementIncomeSecurityAct,1974lawgoverningtheoperationofmostprivatepensionandbenefitplans.Thelaweasedpensioneligibilityrulesandestablishedguidelinesforthemanagementofpensionfunds.ExpenseRatio:annualinvestmentmanagementfeeschargedtospecificmutualfundaccountsexpressedasapercentageofaccountassets.FixedFund:aninvestmentoptionundertheSupplemental401(k)Plan.TheFundisabalancedfundconsistingprimarilyofbondswithsomestocks.


FixedFund"distributionrate":themonthlycreditedinvestmentreturntoaccountsintheFixedFund.Theratewasdeterminedbyformula,andreflectedallinterestanddividends,realizedandunrealizedgainsorlossesoncommonstocks,andotherequitysecurities,andrealizedgainsorlossesonbondsandotherfixedincomesecurities.Tomaintainarelativelystabledistributionrate,gainsandlossesweredistributedoverfiveyears.Index(associatedwiththe5%AccountMethod):Toincreasethenotionalbalanceinthe5%accounteachmonth,MITwillusethereturnovertheprevious12monthsinanindexbased75%ontheLehmanBondIndexand25%ontheRussell3000stockindex,limitedbyafloorof0%andaceilingof15%.(SeeAppendix4.)IndexFund:mutualfundwhoseportfoliomatchesthatofabroad-basedindexsuchastheStandard&Poor500Indexandwhoseperformancethereforemirrorsthemarketasawhole.Manyinstitutionalinvestors,especiallybelieversintheEFFICIENTMARKETtheory,putmoneyinindexfundsontheassumptionthattryingtobeatthemarketaveragesoverthelongrunisfutile,andtheirinvestmentinthesefundswillatleastkeepupwiththemarket.FundsNet:an"openwindow"tomutualfundsmadeavailabletoparticipantsbyFidelityInvestments.IRA:IndividualRetirementAccountsavailableundertheIRSregulationsdescribedinIRSpublication590.IRS,InternalRevenueService:U.S.agencychargedwithcollectingnearlyallfederaltaxes,includingpersonalandcorporateincometaxes,socialsecuritytaxes,andexciseandgifttaxes.Keogh.Self-employedretirementplandescribedinIRSpublication560.Lumpsumdistribution:singlepaymenttoaparticipantorbeneficiarycoveringtheentireamountofanagreement.ParticipantsinIndividualRetirementAccounts,pensionplans,profit-sharing,andexecutivestockoptionplansgenerallycanoptforalump-sumdistributionifthetaxesarenottooburdensomewhentheybecomeeligible.Marketvalue:fairmarketvaluepriceatwhichanassetorservicepassesfromawillingsellertoawillingbuyer.MarketValueAdjustment:priorto1999,whenFixedFundAccountsweredistributedorconvertedtoanannuity,werecreditedwithaone-timeadjustmentknownasamarketvalueadjustment.ThemarketvalueoftheFixedFundfluctuatesdailyandwascomputedmonthly.IfthemarketvalueoftheFixedFundwasgreaterthanthebookvalueofalloftheaccounts,themarketvaluewasdividedbythebookvalue,andthispercentwasappliedto


thebookvalueaccountbalance.ThiswasknownastheMarketValueAdjustment.Attheendof1998,allFixedFundaccountswerecreditedwiththeMarketValueAdjustment.Mark-to-market:adjustingthevaluationofasecurityorportfoliotoreflectcurrentmarketvalues.MinimumDistributionPayment.Minimumannualpaymentsrequiredtobewithdrawnfromplanassetsafterretirementbeginningatage701/2;theamountofthepaymentisdeterminedactuariallybytheageoftheparticipantandanybeneficiary.MutualFund:fundoperatedbyaninvestmentcompanythatraisesmoneyfromshareholdersandinvestsitinstocks,bonds,options,commoditiesormoneymarketsecurities.Thesefundsofferinvestorstheadvantagesofdiversificationandprofessionalmanagement.Amanagementfeeischargedfortheseservices.NormalRetirementAge(NRA):aDefinedBenefittermreferringtotheassumedretirementageusedfordeterminingfullbenefits."OpenWindow":aninvestmentoption,whichprovidesforaccesstoothermutualfunds.Outsourcing:whenathirdpartydoestherecordkeepingofaretirementplan.RPE:theformerplanforserviceandsupportstaffortheRetirementPlanforEmployees.RPSM:theformerplanforfacultyandstaffortheRetirementPlanforStaffMembers.Rollovers:movementoffundsfromoneinvestmenttoanotherwithouttaxliability.Forexample,anIndividualRetirementAccountmayberolledoverwhenapersonretiresintoanannuityorotherformofpensionpayoutsystem.Supplemental401(k)Plan:theMITdefinedcontributionplanthatincludesthecurrentSupplemental401(k)Plan,theformerRPSMplanaccountbalances,andthepre-74memberaccountbalancesundertheformerRPEplan.S&P500Index:abroad-basedmeasurementofchangesinstockmarketconditionsbasedontheaverageperformanceof500(orS&P500)widelyheldcommonstocks.Tax-DeferredAnnuity(TDA):asalaryreductionplanwhichallowsemployeesofnotforprofitorganizationstoelectasanalternativetoreceivingtaxablecashintheformofcompensationtocontributepre-taxdollarstoatax-deferredretirementplan.Tax-ShelteredAnnuities(TSA):Aninvestmentvehicleavailablefromanoutsidevendor,whichcanprovidetaxshelteringofinvestmentgrowth.TIAA-CREF:oneofthefourTDAcompaniesavailabletoMITemployees.


TreasuryInflationProtectedSecurities(TIPS):aninvestmentvehicleavailableontheopenmarket.VariableFund:oneoftheMITSupplemental401(k)Planinvestmentoptions,whichinvestsinstocks.Vesting:therightanemployeeacquiresbylengthofservicetoreceiveemployee-contributedbenefitsunderaretirementplan.1.65%PayMethod:amethodfordeterminingBasicPlanbenefits.Underthismethod,youearnanannualbenefitequalto1.65%ofyourpayeachpayperiod.Thisannualbenefitiscalculatedassumingbenefitpaymentswillstartonyournormalretirementdate,andwillbepaidforaslongasyoulivewithnosurvivorbenefits.5%AccountMethod:amethodfordeterminingBasicPlanBenefits.Underthismethod,abookkeepingaccountinyournameiscreditedeachmonthwithanamountequalto5%ofyourpay.ThisaccountisalsocreditedwithaninvestmentreturnbasedpreviouslyonthereturnforthePlan'sFixedFund,nowtobechangedtoanexternalindex.Whenyouelecttoreceiveyourbenefit,thebalanceinyourbookkeepingaccountisconvertedtoapension(anannuity)usingthePlan'sassumptionsaboutinterestratesandyourlifeexpectancy.10-yearrule:forthepurposesofcalculatinglifeexpectancyforsomepurposes,theageofanon-spousebeneficiarywillbetakenasnolessthat10yearslessthantheparticipant.401(k)Plan:asalaryreductiondefinedcontributionplanwherebyanemployeemayelect,asanalternativetoreceivingtaxablecashcompensation,tocontributepre-taxdollarstoaqualifiedtax-deferredretirementplan.403(b)Plan:alsoreferredtoasaTaxDeferredAnnuity(TDA):aTDAisasalaryreductionplanfornot-for-profitorganizationswherebyanemployeemayelect,asanalternativetoreceivingtaxablecashcompensation,tocontributetoatax-deferredretirementplan.


Appendix2:AnnualExpenseRatiosforVariousMutualFundsStockFundsFidelityBlueChipGrowth .72%FidelityOTC .76%TIAACREFStock .31%Vanguard500IndexFund .19%VanguardInstitutionalIndexFund .06%VanguardPrimecap .51%VanguardWindsor .27%VanguardWindsorII .37%GrowthFundsAverage .145%Growth&IncomeFundsAverage 1.27%BalancedFundsFidelityPuritan .64%TIAACREFSocialChoice .29%VanguardWellesley .31%BalancedFundAverage 1.32%BondFundsFidelityBondPool .20%TIAACREFBondMarket .29%VanguardTotalBondMarket .20%VanguardGNMA .31%SpecialMITFunds"Cloned"MITFixedFund .22%"Cloned"MITVariableFund .28%FidelityUSEquityIndex .10%(InstitutionalIndexS&P500)


Appendix3:ReviewOfThe"MarketValueAdjustment"IssueAsmentionedinSection3.1f,allFixedFundaccountsreceivedamarket-valueadjustmentbasedonreturnsthroughDecember31,1998.OnJanuary1,1999,allparticipantaccountswereevaluatedatmarketvalue.TheseunallocatedfundsweredistributedtoindividualaccountsinproportiontotheirassetvalueonDecember31,1998.Thisisequivalenttoallocatingthefundsasifeveryonedidretireonthisdate.Somefacultyhaveraisedthequestionofwhetherthismethodofallocatingtheunallocatedfundsisfair.Therearetwowaysofframingthefairnessissue.Itisimportanttorecognizethatthesetwoapproacheshaveoppositeimplicationsforwhogainsandwholosesfrommark-to-marketonDecember31,1998relativetothefairnessconsideration.Onewayisbackwardslookingandisreallyreexaminingthehistoricalfairnessoftheexistingprocedure.ThiswayisbasedonaskingthequestionofthevaluethattheaccountswouldhavetodayiftheFixedFundhadbeenmark-to-markethistorically.Withanhistoricalapproach,peoplewithlargeearlyaccumulationsrelativetorecentcontributionslostwhenthemarketvalueadjustmentwasmade.Thesecondwayofframingthefairnessissueistoaskthequestionhowmark-to-marketchangeswhatwouldotherwisehavehappenedifthemethodsoftheFixedFundweretobecontinuedintothefuture.Thatis,ifweweren'tchangingtheFixedFund,thefairnessissueofnothavingmark-to-marketwouldprobablynotberaised,sincethatisthewaywehavebeentreatingeveryonewhoretires.Withaprospectiveapproach,peoplewhowouldhaveretiredunderthecurrentguidelineswithsmallaccumulationsrelativetotheirfinalyears'contributions,loseprospectively.Thisforward-lookingapproachusesthecurrentPlanasabaselineforfairnessconsiderations,whilethebackward-lookingapproachusesahypotheticalhistoryofmark-to-marketasabaselineforfairnessconsiderations.Aftersomedeliberation,theSubcommitteehasconcludedthatitisnotappropriatetorevisitthehistoricalworkingsoftheFixedFund.Moreover,theSubcommitteethinksthattheissueoffairnessasappliedtodepositsthatmightbemadeinthefutureisnotacompellingreasonforchangingtheproposedmethod.Moreover,thisprospectivechangeisjustonepartofmanychangesaffectingfuturedeposits.Thus,theSubcommitteeconcludesthattheproposedallocationisappropriate.


Appendix4:Interestonthe5%AccountAsdiscussedinSection4.2a),undertheBasicPlan,aretireereceivesthelargeroftheannuitycalculatedusingtwodifferentmethodsofcalculation.Onecalculationisanannuitycalculatedbythe1.65%method.Thesecondcalculationistheannuitythatcouldbepurchased(givenannuitypricingatthetimeofretirement)bytheamountinanotionalorshadowaccountwhichiscreditedwith5%ofsalaryeachmonthandearnsanotionalrateofreturn.Todate,the1.65%calculationhasyieldedlargerretirementbenefitsforalmostallretireessincethismaximumapproachwasinitiated.Nevertheless,itisappropriatetousegoodrulesforbothmethodsofcalculation.Also,somewhoweremembersoftheRPSMmaychoosetoretireunderthe5%accounttoretainthelargeroftheRPSMQualifiedSpouseBenefits.TheBasicPlanTheBasicPlanpaysanannuitybasedonthelargeroftheannuityfromthe5%accountandtheannuityfromthe1.65%account.ThisAppendixwillfirstconsidertheissueofanindexforthe5%accountandthenconsidertheimpactofinflationonbothaccounts.5%AccountThe5%Accountworkslikeadefinedcontributionplan,onlythecreditingfortheaccountisbasedonahypotheticalportfolioandMITisfreetoholdadifferentportfolio.Moreover,thereisalimitthattheamountcreditedinanymonthnotbenegative.Inthepastthe5%accountwastreatedthesamewayasthefixedfund.Sincethefixedfunddidnotallocatecapitalgainsallatoncewhentheywereearned,therewasgenerallyapoolofunallocatedfundswhichwouldmakeitfarlesslikelythatthenon-negativityconstraintonmonthlycreditingwouldbind.Thus,thecostofpayingforthenon-negativityconstraintfellontheaccountsthemselves.Aslongasthecapitalgainsbeingcreditedtotheaccountswithdelaywerelargeenough,therewasnocosttoMITfromthenon-negativityconstraint.Withthechangetomark-to-market,thereisnopoolofunallocatedreturnsthatcanbeusedinthisway.Also,underthecurrentIRSregulations,thecontinueduseoftheFixedFundappreciation,asitismanagedbyMIT,isnotanoptionsinceIRSnowrequiresanarm'slengthmethodtocomputeaccountgrowth.Therefore,tocomputethegrowthofthe5%accountafterJanuary1,1999,MITmustselectsomemarketindexwhosegrowthisoutsidethecontrolofMIT.Toincreasethenotionalbalanceinthe5%accounteachmonth,MIThaschosentousethefollowingmethod.Thefirststepistocalculatethereturnovertheprevious12monthsinanindexbased75%ontheLehmanBondIndexand25%ontheRussell3000stockindex.Thisindexwaschosenbecauseitapproximatestheinvestmentpracticeofthefixedfund,theindexthatwasusedinthepast.Thesecondstepistoapplyafloorof0%andaceilingof15%tothisannualreturn.Then,theannualrateofreturnisconvertedintoamonthlyrateofreturn,andappliedtothebalancesinthe5%notionalaccounts.


Choosinganindexthatapproximatespreviouspracticeseemsappropriate.Whilesomeparticipantsmightpreferanindexwithaheavierweightingofstocks,itshouldberememberedthatparticipantswhoaremakinguseofthesupplementary401(k)accountscanholdaportfoliowithmorestockssothattheoverallportfoliobalanceisfelttobeappropriate.ThusconservatismtoprotectthoserelyingveryheavilyontheBasicbenefitsseemsappropriate.AfloorofatleastzeroisrequiredbytheIRSforadefinedbenefitplansuchastheBasicPlan.Inthepresenceofafloor,aceilingtobalancethecostsforMITseemsappropriate.BasedonMonteCarlosimulationsbyconsultingactuaries,aceilingof15%roughlybalancesafloorof0%.However,itshouldbekeptinmindthatthisbalanceissensitivetotheaveragereturnontheindex,aswellastothenatureofthedistributionaroundthataverage.Inparticular,ifweshouldhaveaperiodofprolongedmoderateinflation,itislikelythatreturnswouldadaptandbehigheronaverage.Insuchanevent,therewouldbemoretrimmingofhighreturnsthanoflowonesanditwouldbeappropriateforMITtorevisittheceilingandraiseit,atleasttemporarily,ormakesomeotheradjustmentsuchastheintroductionofacatch-upprovisiononthemonthlyreturnbeingcredited.Thiscouldbedonebasedonthemonthlyreturnortherollingaveragereturn.AlsothiscanbedoneseparatelyforthefloorandtheceilingoronlyforthefloorthatismandatedbyIRS.Wediscussacatch-upprocedurejustforthefloor.Theideaofthecatch-upistocalculatehowmuchadollardepositedatthestartofthenewprocedurewouldbeworthifitwerecreditedwiththeactualreturneachmonth,ignoringafloorofzero.Theactualcumulativereturnwouldbethiscumulativereturnadjustedbyfillinginallthevalues,sothatthecumulativereturnneverdeclined-itwouldbeflatfromthetimethemonthlyreturnwaszerountilthecumulativereturncaughtupwiththecreditedcumulativereturn.Ifthefundhadnonewdeposits,thenthisprocedurewouldcostMITmoney.However,aswithanyprocedurethatdiffersfrommark-to-marketinasmoothingway,somedollarswillearnmorethanmarketwhilesomeearnless.Andtheaggregatesizeoftheaccountswillgrowbecauseofnewdeposits,lesswithdrawalsonretirement,aswellasfromcreditedratesofreturn.Forexampleifthereisamonthinwhichthezerofloorbindsfollowedbyamonthwithalowercreditingratethatrestorestheindex,thefollowinghappens.Anydollarintheaccountbeforethetwomonthsandstillthereafterthetwomonthsisbackatthesameplaceasifthereweremark-to-market.Anydollargoingoutoftheaccountsinthemiddle,becauseofretirementforexample,leaveswithmorethanwouldhavehappenedwithmark-to-market.Anydollardepositedattheendofthefirstmonthwillbeworthlessinthefuturethaniftherehadbeenmark-to-market.Acombinationofaprojectionofthegrowthintheaccountsandthestochasticpropertiesofthereturnindexcouldbeusedtocalculatethelong-runexpectedcostofthesystemandtheimplicationsfornewemployeesrelativetocurrentones.Fordollarsdepositedinthefuture,therewouldprobablybelittlecostinexpectedvalueterms.Fordollarsintheaccountsatthestartofsuchaprocedure,however,thereisaguaranteeandsoanexpectedcosttoMIT.


IfthesimplesmoothingthatMIThasadoptedprovesunsatisfactory,considerationcouldbegiventoaddingacatch-upprovision.Continuedmonitoringoftheworkingsofthissystemisanimportantpartoftheprovisionofbenefits.InflationWeneedtoconsiderhowtheretirementsystemwouldworkifwehaveaperiodwithafewyearsofhighinflation-10-12%forexample.Whilesuchinflationcouldhappeninavarietyofways,perhapstherelevantcasestoconsiderareapureinflation,wherewagesandreturnsoninvestmentkeepupandashockperiodwheretheydonot.Ifreturnskeepsupwithinflation(realratesarenotmuchaffected)thentheportionof5%accountsinvestedinstocks,ininflationindexedbonds(TIPS)andinshorttermdebtmaintaintheirrealvalue.However,holdingsoflong-termnominaldebtdonotkeepupastherealvalueofbothinterestandrepaymentofprincipaldecline.Ifreturnsdonotkeepupwithinflation,then,forstocks,(butnotbonds,)wewouldexpectthatherewouldbeaconsiderableincreaseinthevalueofstocksafterwards.Overthelonghaul,stockvaluesshouldbedeterminedbythepresentdiscountedvalueofrealearnings.Iftheeconomygetsbackonitsgrowthpath,earningsshouldberestoredandthediscountrateshouldberoughlywhereitwasbefore,sostockvalueswouldreturntoasimilarrealvalue.Withinflation,the1.65%accountsdonotmaintaintheirrealvalue.Evenifcurrentearningsandcurrentadditionstothebalanceinthe1.65%accountwouldkeepupwithinflation,therealvalueofallpastcontributionswouldbeeroded.Therefore,pastcontributionsinthe1.65%accountareerodedbyinflationbothforalongperiodofmoderateinflationaswellasashortperiodofhighinflation.Inourreport,weurgethatthisissuebegivensomeattentionbytheMITAdministration.

ReportoftheFPCSubcommitteeonChangestotheMITRetirementPlan Appendix5-1

AGEANDSTATUS paymentstoparticipant

age<591/2workingatMIT MITRP partiallumpsumifterminallyill

IRAage<591/2 IRArulesposttaxcontributionsavailable.flexiblewithdrawalswithoutpenaltyonlyforhighereducationexpenses,forself,descendents,hardship,unreimbursedmedical,disabilityetc.Scheduledannuitypaymentsmaybeginbefore591/2.DescribedinIRSpub590

age<591/2notworkingatMIT MITRP MITorcommercialannuity;"2/3"oflumpsum;non-annuityflexiblepaymentsor

rolloverintoIRAwithspousalconsent.

IRA591/2<age<701/2 IRArules

posttaxcontributionsavailable.flexiblewithdrawalswithoutpenaltyonlyforhighereducationexpenses,forself,descendents,hardship,unreimbursedmedical,disabilityetc.Scheduledannuitypaymentsmaybeginbefore591/2.IRSpub590

591/2<age<701/2workingatMIT

MITRP age591/2to65:partiallumpsumifterminallyill.Age65to701/2:One-timepartiallumpsum;partiallumpsumifterminallyill;MITorcommercialannuityofRPSM

591/2<age<701/2retiredorworkingatMIT<50%time

MITRP MITorcommercialannuity;"2/3"oflumpsum;non-annuityflexiblepaymentsorrolloverintoIRSwithspousalconsent.

age>701/2workingatMIT MITRP MITorcommercialannuityofRPSM;One-timepartiallumpsum;partiallumpsumif

terminallyill

age>701/2retiredorworkingatMIT<50%time

MITRP

working<50%atMIT:One-timepartiallumpsum;partiallumpsumifterminallyill;MITorcommercialannuityofRPSM.NotworkingatMIT:IRS-prescribedminimumpayment;MITorcommercialannuityatanyage;"2/3"oflumpsum;non-annuityperiodicpayments;rollovertoIRAwithspousalconsent

IRAage>701/2 IRArules

lumpsumpayoutorminimumdistributionpayoutsmustbeginatage701/2,paymentsdeterminedbylifeexpectancyofparticipantandbeneficiaryunderIRStables,pub590.Beneficiariesmorethantenyearsyoungerthanparticipantsaretakenastenyearsyounger.

"2/3"lumpsum=100%Supplemental+100%RPSMmember+50%MITRPSM

AGEANDSTATUS

atdeathofparticipantwithspousebeneficiary;priortoannuitycontract

<591/2workingatMIT MITRP Fullbenefittosurvivor;spousecanrollovertoIRA;spousecantransfer401(k)assetsto

BasicPlanforannuitypayment

APPENDIX5:DISTRIBUTIONSFROMMIT401(k)PLANANDIRAs

DISTRIBUTIONSFROMMIT401(k)PLANANDIRAs(CONT)


IRAage<591/2 IRArulesrolloverintospousalIRAwithredesignationofbeneficiarywithspousepayoutrulesorlumpsumpayment.ifthespousediesbeforereceivingdistributions,spouse'sbeneficiaryistreatedas"spouse"

age<591/2notworkingatMIT MITRP Fullbenefittosurvivor;spousecanrollovertoIRA;spousecantransfer401(k)assetsto


IRA591/2<age<701/2 IRArules

rolloverintospousalIRAwithredesignationofbeneficiarywithspousepayoutrulesorlumpsumpayment.ifthespousediesbeforereceivingdistributions,spouse'sbeneficiaryistreatedas"spouse"


MITRP Fullbenefittosurvivor;spousecanrollovertoIRA;spousecantransfer401(k)assetstoBasicPlanforannuitypayment


MITRP Fullbenefittosurvivor;spousecanrollovertoIRA;spousecantransfer401(k)assetstoBasicPlanforannuitypayment

age>701/2workingatMIT MITRP Fullbenefittosurvivor;spousecanrollovertoIRA;spousecantransfer401(k)assetsto



MITRP

workingatMIT:Fullbenefittosurvivor;spousecanrollovertoIRA;spousecantransfer401(k)assetstoBasicPlanforannuitypayment.NotworkingatMIT:beneficiarycontinuestoreceivescheduledpayments,payoutmustbeatleastasrapidasscheduledpriortoparticipantsdeath.10yearruleapplies.spousemayrolloverundistributedassetsintoaspousalIRA

IRAage>701/2 IRArulesbeneficiarycontinuestoreceivescheduledpayments,payoutmustbeatleastasrapidasscheduledpriortoparticipantsdeath.10yearruleapplies.orspousemayrolloverundistributedassetsintoaspousalIRA

AGEANDSTATUS

atdeathofparticipantwithnon-spousebeneficiary;priortoannuitycontract(spousalconsentpermitsnamingotherbeneficiaries)

<591/2workingatMIT MITRP

fullbenefitpaidtosurvivororestateaslumpsum,maybeleftifplanfor5years;foradesignatedbeneficiary,payoutoverthelifeexpectancyofthebeneficiaryatactuallifeexpectancy,paymentsmustbeginwithinoneyearusingcommercialannuityorscheduledpaymentsbasedonlifeexpectancy

IRAage<591/2 IRArules lumpsumpayment,payoutover5yearsorpayoutoverthelifeexpectancyofthebeneficiaryatactuallifeexpectancy,paymentmustbeginwithinoneyear

age<591/2notworkingatMIT MITRP


DISTRIBUTIONSFROMMIT401(k)PLANANDIRAs(CONT)


IRA591/2<age<701/2 IRArules lumpsumpayment,payoutover5yearsorpayoutoverthelifeexpectancyofthe

beneficiaryatactuallifeexpectancy,paymenttobeginwithinoneyear


MITRP



MITRP


age>701/2workingatMIT MITRP



MITRP beneficiarycontinuestoreceivescheduledpayments,payoutmustbeatleastasrapidasscheduledpriortoparticipantsdeath.10yearruleapplies.

IRAage>701/2 IRArules beneficiarycontinuestoreceivescheduledpayments,payoutmustbeatleastasrapidasscheduledpriortoparticipantsdeath.10yearruleapplies.

InterimReport

FacultyPolicyCommittee

February,1999

SubcommitteeonChangestotheMITRetirementPlan

"StudyingtheMITRetirementPlanislikepeelinganonion:thereisalwaysanotherlayer""StudyingtheMITRetirementPlanislikepeelinganonion:there'salwaysanotherlayer"

Goal:Tounderstandandtoconvey,byawrittenreporttotheFacultyPolicyCommittee,theeffectoftheproposedchangesintheRetirementPlanonitsmembers,andtomakesuggestionsforimprovement.Charge:1. Toanalyzeandunderstandthedifferencesbetweentheproposedchangesandthe

currentPlanintermsof:

• availableoptionsandservices,and• risks(ontheupsideandthedownside)tomembers

2. Tohighlightanyspecificissuesthatmaycauseproblemsorpresentopportunitiesformembers.

3. Toidentifyspecificsuggestions,ifthereareany,ofmodificationsintheproposedchangesthatcouldalleviateanyoftheidentifiedproblems.

4. Toconveyinawrittenreporttheresultsofthisanalysis.TheSubcommitteemembershipis:

SheilaWidnall,[email protected]@[email protected]@[email protected]@mit.edu

InterimReportoftheFPCSubcommitteeonChangestotheMITRetirementPlan 2

TableofContents1.SummaryandConclusions2.Overview

2.1ComponentsoftheMITRetirementPlan2.2WhytheNeedforChange?2.3HighlightsofChangestothePlan

3.ChangesintheMITRetirementPlan

3.1ChangestotheSupplemental401(k)/RPSMPlans3.1aIncreaseAllowableinEmployeePre-TaxContributions3.1bInitiateThirdInvestmentOption3.1cFreerExchangeBetweenInvestmentFunds3.1dOutsourcingofFundManagementtoFidelitywithAdditionalInvestmentOfferingsavailableSpring19993.1eTransferofInvestmentExpensestoParticipants3.1fChangesinFixedFundAccountingtoMarketValue3.1gAdditionofImmediateVesting3.1hAdditionofNewAnnuityOptions3.1iProvisionforEarlyDistributionofPlanAssets3.1jProposedEliminationofPost-TaxContributionsonJanuary1,20003.1kLoansavailable(withIRSrestrictions)

3.2ChangesEffectiveJanuary1,1999inTheBasicPlan3.2aRevisionofCreditingProcedureforthe5%Account3.2bChangingofNormalRetirementAgefrom65to623.2cBenefitAccruedPastNormalRetirementAge(NRA)

4.FutureIssues

4.1Withdrawals,Annuities,andLumpSumDistributions4.2Interestonthe5%Account4.3ProposedEliminationofPost-TaxContributionsonJanuary1,20004.4ParticipantServices

4.4aCommunications4.4bCounseling


Appendix1:GlossaryofTermsAppendix2:AnnualExpenseRatiosforVariousInvestmentOptionsAppendix3:Reviewofthe"MarketValueAdjustment"Issue


1.SummaryandConclusionsTheBenefitsOfficeinconjunctionwiththeStrategicReviewofBenefitsCommitteeandtheCommitteeonFacultyAdministrationhavedevelopedproposalstodealwithissuesaffectingtheMITRetirementPlan(MITRP).Someoftheproposedchangesarerequiredtokeeptheplantax-qualified,andwereinstitutedonJanuary1,1999;someofferincreasedflexibilitytodrawretirementbenefitswhileworkingparttimeandincreasedbenefitsfromaloweringofthenormalretirementagetoallowindividualstophaseintoretirement.Onecomponentofthechangesisaresponsetoconcernsthattheplan'sinvestmentoptionsaretoolimited,withonlytheFixedandVariableFundavailableformanagingparticipants'accounts.Thechangesthatprovideaccesstoawidersetofoptionswillallowparticipantstobuildaninvestmentportfoliotomeettheirindividualneeds.Finally,sincetheservicingoftheplanhasgottenbeyondthecapacityofMITtomanage,theplanadministrationwillbeoutsourced.TheseproposalsforchangehavebeenpresentedtotheMITcommunityinavarietyofforums.Buttheissuesarecomplexandconstrainedbylegalandregulatoryrequirements.Somearehighlytechnical,requiringconsiderableefforttomasterallthedetails.Therefore,theFacultyPolicyCommitteeappointedthissubcommitteetostudytheseproposedchanges,andtorecommendmodifications,ifnecessary,tomeetexpressedconcerns.TheCommitteepresentsthisinterimreportontheirfindingstotheFacultyPolicyCommittee,andwillfollowwithafinalreportinthespringwhenindividualconcernshavebeenreceivedandthechangeshavebeencompletelyspecified.ItisnottheintentionofthisreporttosubstituteforMITRPdescriptions,documentsandtheannualreports,whichareavailablefromtheBenefitsOfficeandontheirwebsite,http://hrweb.mit.edu/benefits.Ratherwewishtolayasufficientfoundationforourobservationsandconclusions.Wehopethattheworkofthiscommitteewillhelpinthediscussionofthechangesinprogress.Inourreviewtodate,wehaveconcentratedonthoseissuesthatforlegalandregulatoryreasonshadtobesettledtomeetaJanuary1,1999deadline,andotherchangesthatwereputinplaceatthesametime.Amongtheseveralchanges,fourissueshavereceivedmostofourattention,andourconclusionsabouttheseitemscanbesummarizedasfollows.Eachisdiscussedinmoredetailinthebodyofthisreport.TheChoiceofFidelityInvestmentstoManagetheDefinedContribution/401(k)Assets.AsofApril1,1999,themanagementofthiscomponentofplanassetswillbecarriedoutusingtheservicesofFidelityInvestmentstomanageindividualinvestmentaccountsforparticipants.WehavereviewedthestepsthattheBenefitsOfficewentthrough,seekingbidsandnegotiatingfees,andwearecomfortablewiththeprocedurefollowed.


TheShiftingofInvestmentAccountExpensesfromMITtotheParticipants.Thischangewillresultinasmallreductioninthegrowthofaparticipant'sultimateretirementassetsforthosewhoremaininvestedinthefundsthatare"cloned"fromthecurrentFixedandVariableFunds.Theincreasedoptiontochooseotherfundswithpossiblyhigherreturnsmaymakeupforthisloss.Allinall,itisourconclusionthatthischange,whichputsusinlinewithalmostallourcompetinginstitutions,isfair.Wealsobelievethatthischangeshouldbeconsideredinbalancewithallofthechanges,someofwhichincreasebenefitstoparticipantsRequiredEliminationofFixedFundBookValueandProcedureforAccomplishingChangeinAccountingforFixedFundAccountstoCurrentMarketValue.Tocalculatethe"bookvalue"ofmemberFixedFundaccountsafive-yearsmoothingprocedureforcreditingcapitalgainswasusedbyMITtolowerthevolatilityofcreditedreturns.Withtherequiredremovaloftheguaranteetopayatretirementthegreaterofbookvalueormarketvalue,aportionofthecapitalgainsofrecentyearshadtobeallocatedtomemberaccountstobringthemtomarketvalueasofJanuary1,1999.Wehavereviewedtheprocedureusedtoallocatecapitalgainstomemberaccounts,anditspotentialforcreatinginequitiesbetweenmembersoflongstandingandthosewhojoinedonlyrecently,andfoundittobeasoundapproach.The(Mandated)ChoiceofanIndexOutsideMIT'sControlforCalculatingReturnsonCertainAccounts.Inthepast,MIThasmanagedtheassetsthatlaybehindonepartoftheMIT-fundeddefinedbenefitcomponentoftheMITRP,andtherateofreturnonmember'saccountswasbasedonMIT'sactualinvestmentresults.TheIRSnowrequiresanon-MITindexforthispurpose.MIThaschosenanalternativeindex,andspecifiedmaximumandminimumvalues,onaprovisionalbasis.Discussioncontinuesregardingtheultimateformoftheindex(whichwillberevised),anditistheCommittee'sjudgmentthatthisinterimstepisappropriate.RemainingIssues.Severalissuesremaintobesettled,andourCommitteewillfollowthemthroughthecomingmonths.Keyamongtheseistheevolutionofthesystemprovidingwithdrawals,annuitiesandlumpsumdistributions,theultimateselectionofthemarketindexforpartofthedefined-benefitassets,andpossibleeliminationofpost-taxcontributionstothedefined-contributioncomponentoftheplan.TheseissuesarecoveredinmoredetailinSection4.Also,withthegreaterflexibilityprovidedintherevisedplancomesgreaterrisksothattheextentandqualityoftheinformationprovidedtoparticipantstakesongreaterimportance.ThisissueisalsocoveredinSection4.Inthisinterimreport,wecoverthekeyfeaturesofthechangesmadeasofJanuary1,1999,andfurtherrevisionstocomeinspring1999andbeyond.Anumberofspecializedtermsandacronymsareusedinthepresentation,andthesearedefinedinAppendix1.WefeelcomfortablethatthechangesthatwentintoeffectonJanuary1,1999arefair.WewereaidedinourdeliberationsbystafffromtheBenefitsOffice,thePersonnelOfficeandtheTreasurer'sOffice.Wethankthemfortheircollegialandexpertinputtoourunderstandingoftheseissues.


2.Overview2.1ComponentsoftheMITRetirementPlanForthepasttenyears,theMITRetirementPlan(MITRP)hasconsistedoftwocomponents,theBasicPlan--definedbenefitplansupportedbycontributionsonlyfromMIT,andtheSupplemental401(k)Plan--contributorydefined-contribution401(k)plan.Thiscomponentreceivesmembercontributions,whicharematchedbyMIT.WenowdescribeelementsofthisplanexclusiveofthechangesthatwereinitiatedonJanuary1,1999andthenwehighlightthechanges.TheMITRetirementPlancoversallemployees,facultyandstaff,attheInstitute.Itistheproductofamergerofseparateplansin1989:TheRetirementPlanforStaffMembers(RPSM)andtheRetirementPlanforEmployees(RPE).Someofthedetailsofthecurrentplanaretheresultofthecarryoveroffeaturesandrestrictionsfromthisearliersystem.Whentheplanwasmodifiedin1989,individualaccountsfromthepriorRPSMweremaintainedasRPSM401(k)accountsandsegregatedfromtheSupplemental401(k)accountsestablishedunderthenewplan.NofurthercontributionshavebeenmadetotheseRPSMaccountsbuttheycontinuetoappreciateandformpartoftheoveralldefined-contributionassetsforfacultyandstaffhiredbefore1989.FacultyandstaffjoiningMITafter1989donothaveRPSMaccounts.Atthetimeofretirement,thecombinationoftheSupplemental401(k)PlanandtheRPSMaccountswillprovidemostofthetotalretirementbenefitofalong-termfacultymemberwhohascontributedthemaximumamountoverhisorhercareer.ThebenefitfromtheBasicPlanisexpressedasthevalueofasingle-lifeannuitypayableatretirement,althoughtheparticipantmayactuallychoosefromavarietyofannuityoptionsofequivalentvalue.Thisannuitymayincrease,afterretirement,throughtheapplicationoftriennialcostoflivingadjustments.TheInstitutefundsthisbenefitthroughperiodiccontributionstotheBenefitsFundoftheMITRP'sTrust.BasicPlanbenefitsareinsuredbythePensionBenefitGuarantyCorporation(PBGC).ThevalueatretirementofanaccountintheSupplemental401(k)Plan(wherethecontributionsaredefined,butnotthebenefits)dependsonanumberoffactors.Allparticipantshavehadtheopportunitytovoluntarilycontribute1%-5%ofsalarytotheSupplemental401(k)Plan.TheInstitutematchesthesecontributionsdollar-for-dollar.ThisaccounthasbeeninvestedintheFixedandVariableFundsasdirectedbytheparticipant.AccountsaccumulatedundertheformerRPSMarealsoinvestedintheFixedandVariableFunds.Thisplanconsistedofthe10%contributionfromMITplusarequired5%contributionfromtheparticipant.Underthecurrentrules,onehalfofthecontributionfromMITplusitsinvestmentreturnshavetobeannuitizeduponretirement.


Thusthetotalvalueofanindividual'saccountintheSupplemental401(k)PlanandintheRPSM(ifany)atretirementdependsonthemember'scontributiontotheplan,theMITcontribution,thechoicesmadebytheparticipantbetweeninvestmentsintheFixedandVariableFunds,andtheperformanceofthefinancialmarketswherethefundsareinvested.TheInstitutehasprovidedrecord-keepingservicesandthetrusteeshaveguidedtheinvestmentpolicy,eventhoughalmostallday-to-dayinvestmentdecisionsweremadebyoutsidefirms.TheInstitutehaspickedupallofthecostsassociatedwiththeplan,suchasinvestment,custodial,legal,andactuarialfees.ThenormalpracticeistodeductthesecostsfrominvestmentreturnsasisdonebyTIAA/CREFandsomeother401(k)retirementplansortochargeparticipantsafeeasapercentageofaccountbalance,withtheemployerpayingaflatfeeperparticipant.TheInstitutehassetannuityratesbyasmoothingformulathatlimitsthemaximumincreasesordecreasestothefixedannuityinterestrateto.25%perquarter.Thissmoothingcanincreasebenefitswhenratesaredropping,butcanlowerthemwheninterestratesarerising2.2WhyTheNeedForChange?First,certainpracticesmustbeamendedinordertopreservethetax-qualifiedstatusoftheplanandbringtheplanup-to-datewithchangesinIRSregulations.Theadvantagesofpreservingthisstatusaremany.Underatax-qualifiedplan,substantialbenefitsflowtoplanparticipants:participantspaynotaxesonemployercontributionsuntilfundsarewithdrawn;participantsmaymakepre-taxcontributions;investmentreturnsaccumulatetax-deferred;certainlump-sumdistributionsmaybetaxedatreducedrates;andaccruedbenefitsmaynotbeattachedincaseofbankruptcy.Second,manyviewtheinvestmentoptionsintheSupplemental401(k)PlanandtheRPSMasbeingverylimited,withonlythechoicebetweentheFixedandVariableFundandrestrictionsonmovementoffundsbetweenthem.Somefeeltheydonothavesufficientoptionsthatwouldallowthemtobuildaninvestmentportfoliotomeettheirneeds.Finally,theservicingoftheplanhasgottenbeyondthecapacityofMITtomanagetothestandardssetbymodernfinancial-servicesinstitutions.Thisincludesprovidingresponsiverecordkeeping,managingincreasedinvestmentoptions,providingup-to-dateaccountvaluation,supplyingadditionalservicetomembers,expandingannuityofferings,andinsuringcontinualIRSqualificationoftheplanwiththefrequentchangesinregulations.ThequestionthenarisesastowhetherthecoremissionofMITshouldincludebeinginthebusinessof401(k)recordkeeping.TheBenefitsOfficeinconjunctionwiththeStrategicReviewofBenefitsCommitteeandtheCommitteeonFacultyAdministrationhasdevelopedproposalstodealwiththeseandotherissues.Someoftheproposedchangesarerequiredtokeeptheplantax-qualified,andwere


institutedonJanuary1,1999;otherswilloccurinthespringof1999.TheCommitteehasreviewedthesechangesandweoutlinethembelowwithourcomments.2.3HighlightsofChangestothePlanSomechangesdealwiththerequestformoreinvestmentoptionsandbetterservices.Thisisaccomplishedbyoutsourcingtheadministrationandmanagementoftheplantoanoutsidefinancialservicesinstitution,FidelityInvestments,andallowingplanparticipantsamuchwiderchoiceofinvestmentoptions.Initsdecisiontooutsourcethemanagementandadministrationofindividualaccountsandofferawiderchoiceofinvestmentoptions,MIThelddiscussionswithseveraloutsidefinancialserviceorganizations.WehaveexaminedtherequirementsestablishedbyMITandtheproposalsreceivedfromseveralvendors.TheCommitteealsoreviewedtheprocessthatwasusedtoselectFidelityInvestmentsastheoutsidevendorforthe401(k)portionoftheplanandwearecomfortablewiththeprocess.Thischangewillbeseenasabenefitbymanywhohaveaskedformoreinvestmentoptions,butmaybeofconcerntootherswhohaveneitherthetime,theexperiencenortheinclinationtoenterintomoredirectmanagementoftheirretirementassets.Toaccommodatetheseconcerns,theinvestmentoptionswillincludethecontinuationofthecurrentFixedandVariableFunds.ByApril1,1999,thecurrentassetsoftheMITFixedandVariableFundswillbetransferredtoFidelityInvestmentsfortheirday-to-daymanagement.TheinvestmentguidelinesoftheFixedandVariableFundswillbesetbyanMIToversightcommittee,followingthecurrentphilosophyofthesefunds,butspecificinvestmentdecisionswillnowbemadebyFidelityInvestments.TheseparticularfundswillbemanagedasmutualfundsbutofferedonlytoMITRPparticipants.Theyhavebeenreferredtoas"cloned"fundsinsomeMITliterature.AlthoughtheFixedFundwillinitiallycontaintheinvestmentvehiclesthatcurrentlymakeuptheMITFixedFund,andtheinvestmentpolicyoversightwillbeprovidedbyMIT,itdiffersfromthepreviousMITFixedFundinthatitwillalwaysbevaluedatmarket.Thusduringperiodsofrapidgrowth,itwillshowthefullmarketincrease.Conversely,duringmarketretrenchments,itsvaluecandecrease.InadditiontotheFixedandVariableFunds,participantswillhaveaccesstoavarietyofmutualfunds.EachofthesefundsbearsaspecificexpenseratiochargethatissetbyFidelity,insomecasesafternegotiationwithMIT.Differentfundsincurdifferentexpensesformanagingthefundincludingmanagementandtradingexpenses,investmentadvisoryservicefeesandadvertising.Theproposalisfortheexpensesoftheindividualfundaccountstobetakenoutofgrossinvestmentreturnssothatparticipantaccountsreceiveinvestmentreturnsnetofthesefundexpenses.SincethebulkoftheinvestmentfeesontheFixedandVariableFundshavetodatebeenpaidbyMIT,chargingthesefeestotheaccountsinthefuturewilladverselyaffectaccountbalancesforallparticipantsincludingretiredfacultywhohaveaccounts.Theannualexpenseratiosfortheuniverseofmutualfundsaretypicallyintherange.1%to1.5%of


assetsdependingontheinvestmentoptionselected(seeAppendix2foratableofannualexpenseratiosforvariousinvestmentoptions.).Alsointhefuture,MITwillnegotiategroupratesforannuities,whichwillbeavailabletoparticipants.AnexpressedconcernhasbeenthatanoutsidefirmwouldnotsetannuityratesusingthesameformulathatMIThasbeenusingtosetthem,andwouldthereforesubjectretiringparticipantstogreaterriskfrominterestratefluctuations.Tomeetthisconcern,MITwillprovideretireeswithachoice,foraperiodoftimethelengthofwhichisstillunderdiscussion,betweenusinganMIT-setannuityrateoronethatMITnegotiatesatagroupratewithacommercialcarrier.Therearemanyotherproposedchanges.Somearedesignedtoenableearlyretirementbyprovidingincreasedflexibilityandincreasedbenefits.IRSregulationspermitmoreflexibilityinphasingintoretirementthanispresentinthecurrentplan.Bychangingthenormalretirementage(NRA)to62,andallowingretirementbenefitstobedrawnwhileworkingparttime,theMITRPwillprovideindividualswithincreasedoptionsandincreasedbenefits.Thenextsectionlaysoutthevariouschangesinmoredetail.3.ChangesintheMITRetirementPlanThissectiondescribingthechangesisdividedintotwoparts.ThefirstpartdealswithchangestotheSupplemental401(k)Plan.ThechangesinplanadministrationfortheSupplemental401(k)PlanwillalsoapplytoassetscontainedintheRPSMPlanasdiscussed.(SeeAppendix1foraglossaryofterms).ThesecondpartdealswithchangestotheBasicPlan,thedefinedbenefitplantowhichMITisthesolecontributor.3.1ChangestotheSupplemental401(k)/RPSMPlanTherevisionstotheSupplemental401(k)/RPSMPlanfallintotworoughcategories.OnesetresultsfromchangesmadeasofJanuary1,1999.AsecondsetofrevisionswillcomelaterwiththecompletionofthetransferofplanassetsandmanagementtoFidelityInvestments,expectedsometimeinspring1999.Botharediscussedbelow.3.1a)IncreaseinAllowableEmployeePre-TaxContributionsAnimmediatechangewillbeanincreaseintheamountaparticipantcancontributetotheSupplemental401(k)Plan,asapre-taxemployeecontribution.Thecurrentmaximumis5%.AfterJanuary1,1999,anindividualwillbeabletocontributeasmuchas20%uptoamaximumof$10,000.TheMITmatchwillremainatdollar-for-dollaronlyupto5%.3.1b)InitiateThirdInvestmentOption


ERISAgivesadvantagestoretirementplansthathaveatleastthreeinvestmentoptions.TheMITRPwillmeetthiscriterionbyimmediatelyofferingamoneymarketfundthroughFidelityInvestmentsintowhichparticipantscanshiftaccountassets.Themoneymarketfundwillbearanexpenseratioof.42%ofassetseffectiveJanuary1,1999,thusreportingreturnsnetofthischarge.TherewillbenocostforFixedorVariableFundassetsuntilApril1,1999afterfulltransfertoFidelityInvestmentsatwhichpointtheywillbearexpenseratiosof.22%and.28%respectively.3.1c)FreerExchangebetweenInvestmentFundsERISAgivesadvantagestoretirementplanthatofferparticipantstheopportunitytotransferassetsamongallavailableinvestmentoptionsatleastquarterly.Previously,theMITRetirementPlanrestrictedtransfersofassetsbetweentheFixedandtheVariableFunds.Inordertotransferassets,theparticipanthadtobeaboveage55,andthenassetscouldonlybetransferredfromtheVariabletotheFixedFund.AsofJanuary1,1999,aparticipantmaytransferfundsmonthlyamongthreefunds,Fixed,VariableandthenewMoneyMarketFundwithoutanyrestrictionsonage.AndafterApril1999,withthenewaccesstoandinformationaboutindividualaccounts,dailytransferswillbepermittedacrossalloftheoptions.3.1d)OutsourcingofFundManagementtoFidelityWithAdditionalInvestmentOfferingsAvailableSpring1999Inthespringof1999,anumberofadditionaloptionswillbeavailable.FidelityInvestmentswilloffertheFixedandVariableFundswithinvestmentoversightpolicyprovidedbyMIT.Supplementingtheseoptionswillbeasetof8to10CoreFundsofferingavarietyofriskandreturnprofiles.TheBenefitsOfficewillsupportthesefundswithinformationalbrochuresandinvestmentanalysissoftware.Finally,forMITRPparticipantswhowishtohaveaccesstoastilllargergroupoffunds,FidelityInvestmentswilloffer,withoutadditionaltransferfees,accesstoselectionsfrom21MutualFundfamiliesthroughitsFundNet.Someparticipantshaveinquiredwhethersharesinindividualcompanieswillbeacceptableinvestmentvehicles.Theanswerisno.IRSrulesrequirearm'slengthtransactionsin401(k)plans.Sinceitisnotpossibletoinsurethatthereisno"interest"inaparticularstockpurchase,thisoptionwillnotbeavailabletoMITRPparticipants.Theinitialtransferofaparticipant'sretirementassetstoFidelityInvestmentswillcreatetwoseparategroupsofaccounts:group#1willbeacombinationofallcurrentSupplemental401(k)balancesplusanyRPSMmembercontributionaccount,and50%ofanyRPSMMITcontributionaccount.Group#2willbetheremaining50%ofanyRPSMMITcontributionaccount.Atinitiation,assetsintheseaccountgroupswillbeinvestedinthesameproportionsoftheFixedandVariableFundastheyarenow.Theresultingbalanceingroup#2maynotbepaidasalumpsumatretirement.However,therequirementthatthesefundsbeannuitizedwillbeeased.Instead,retireeswillbe


allowedtohavethisportionoftheirassetspaidinanyform(includingannuity)thatresultsinpaymentsbeingmadeininstallmentsthatcontinueatleast10years.Theparticipantwillhavethefullchoiceofinvestmentoptionsforallaccounts.Thestructureofthenewplanwithitsuseofindividualaccountsthataremarked-to-marketmakesitpossibleforindividualstorolloverfundsfromcertainotherqualifiedplanssothattheirassetscanbemanagedinoneplace.Manyfacultymayfindthisanattractiveoption.Possibilitiesforrolloversincludeother401(k)plans,KEOGH's,andSEP-IRA's.However,IRSregulationscurrentlydonotallowrolloversofeither403(b)plansorTDA's.Assetsthatarerolledoverintoanindividual'saccountwillbesegregatedfromtheMITRPaccountsandtheindividualwillbearanycostsfromarolloverfromaKeoghorIRAaccount.3.1e)TransferofInvestmentExpensestoParticipantsUnderthecurrentplan,MIThasbornetheexpensesforthe8700employeescurrentlyintheplan.Inaddition,sincethereisnooptiontotreatparticipantsdifferentially.MIThasbornetheexpensesforthe5300formeremployeeswhohavenotretiredforwhomMITcontinuestoholdanaccount.AfterApril1,theproposalistohaveallplanparticipantspayinvestmentexpensesassociatedwiththeexpenseratiosoftheparticularinvestmentoptionthattheyhavechosen.MITwillbearthecostofthetransitionbetweenMITandFidelityInvestments.WiththeexceptionoffundsinvestedafterJanuary1,1999inthemoneymarketaccount,noaccountwillbechargedinvestmentexpensesandwillcontinuetoreceivethegrossreturnontheassetsuntilApril1,1999.MITwillcontinuetopaytheMIT-basedexpensesofoperatingtheplan,suchasthecommunicationandcounselingthatindividualsreceivefromtheBenefitsOfficeandanyon-campusrecordkeeping.Thus,aftertheplanissetup,participantswillreceivenetinvestmentreturns,asoccursforatraditionalmutualfundinvestmentaccount.Expenseratiosare:fortheFixedFund,anannualexpenseratioof.22%ofassets;fortheVariableFund,anexpenseratioof.28%ofassets.Otherchoiceswillbearotherexpenseratios.OneoptionavailableonlytoMITparticipantswillbeaninstitutionalS&P500Indexfundatanexpenseratioof.1%ofassets,roughly50%belowthebestrateavailabletoindividualinvestors.Sincethesefundsaccumulatetaxfree,theseexpensesarepaidwithbeforetaxassets.(SeeAppendix2foratableofAnnualExpenseRatiosforVariousInvestmentOptions.)InconsideringthischangeinthechargingofMITRPinvestmentexpensestheCommitteehasconsideredseveralissues.Withthemovetoparticipantchoiceofinvestmentoptions,eachaccountwillbearaspecificcost,dependingonoptionschosenbytheparticipant.IthasbeensuggestedbysomethatMITfundtheFixedandVariableFundcharges,expectingindividualstopaythecostsoftheirchoicesofotheroptions.Anothersuggestionwouldbetofundanequivalentportionoftheexpensesforallfunds.AnotheroptionwouldbeforMITtopayaportionofthecostsforallparticipantsintheMITRPforatransitionperiod.Thesesuggestionsmustbeviewedinlightofthefactthattheplan'sinvestmentoptionswillincludemutualfunds(andotherfundsthatusethemutualmodelforfundingexpenses).


Mutualfundaccountingsystemsarestructuredtodeductexpensesdaily,sothatnetreturnsarereported.Inaddition,thedailydeductingofexpensesisoutlinedinamutualfund'sprospectus,andmustapplytoallaccountholdersasoutlinedbytheprospectus.ThismakesitvirtuallyimpossibletotrackgrossreturnsforMITparticipants.TherehasbeenashiftawayfrombeingabletorecoverpensionplancostfromtheportionoftheEmployeeBenefitPoolsupportedbyfederalcontracts.AndwiththemovetosupportingfullfacultysalariesonInstitutefunds,MITnowpaysamuchgreatershareoftheseemployeebenefitexpensesoutofitsgeneralbudget.WeraisetheissuethatthefacultybenefitsinotherwaysfromthecostsavingsexperiencedbyMITbyhavingplanparticipantspayinvestmentcosts,thusfreeingupdiscretionaryfundsforeducationalandresearchpurposes.Asmentionedabove,therearegoodreasonsforshiftingthiscostfromMITtoplanparticipants.TheCommitteebelievesthatthiscostshiftingshouldnotbeconsideredinisolation,butevaluatedinthecontextofallchanges,someofwhichincreasecoststoMIT,andmoregenerallyintermsoftheoverallretirementbenefitspackage.Forallofthesereasons,webelievethisisafairproposal.3.1f)ChangeinFixedFundAccountingtoMarketValuePriorto1999,aparticipant'sFixedFundaccountvaluewasexpressedasits"bookvalue,"definedasthesumofMITandindividualcontributionsplusinterestanddividendsandaportionofnetcapitalgainsexperiencedbytheFixedFund.Theaggregateofbookvaluescoulddifferfromtheaggregatemarketvalueofthefund."Marketvalue"isdefinedasthesumofMITandindividualcontributionsplusinterestanddividendsandallnetcapitalgainsexperiencedbytheFixedFund.Atthetimeofpaymentoftheparticipant'saccount,suchasatretirement,ifthemarketvalueofthefundexceedstheaggregateofbookvalues,thebookvalueofthefundisincreasedbya"marketvalueadjustment"whichmultipliesthebookvalueofanindividualaccountbytheratioofaggregatemarketvaluetotheaggregateofbookvalues.Atalltimessincethisbookvalue-marketvaluecomparisonhasbeenperformed,themarketvaluehasexceededthebookvalue.Theamountbywhichmarketvaluehasexceededbookvalueisthe"marketvalueadjustment."During1998,inresponsetothegrowthinthemarket,thefollowingmarketvalueadjustmentshavebeenexperienced.

• August12.3637%• September15.6972%• October16.2831%• November16.9393%• December17.7933(subjecttoreview)

Thepossibilityofpayingabenefitatavalueotherthantheaccount'smarketvalueviolatesIRSqualificationrequirements.Therefore,theconceptofbookvaluemustbeabandoned.Asaresult,allFixedFundaccountsreceivedamarket-valueadjustmentbasedonreturns


throughDecember31,1998,andonJanuary1,1999allparticipantaccountsweregiventhemarketvalueadjustment,asdescribedabove.Fromnowon,theywillbeatmarketvalueeachday.Theproposalis--andtheIRSrequires--thatthesefundsbeallocatedinproportiontotheassetvalueoftheindividualaccountsonDecember31,1998.Thisisequivalenttoallocatingthefundsasifeveryonewereretiringonthisdate.Somefacultyhaveraisedthequestionofwhetherthismethodofallocatingtheunallocatedfundsisfair.Afterconsiderabledeliberation,theCommitteehasconcludedtheprocessusedwasappropriate.TheCommittee'sreasoningisdescribedinAppendix3.3.1g)AdditionofImmediateVestingUnderthenewplan,vestingwillbeimmediate.Thatis,aparticipantwillimmediatelyhavearightnotonlytohis/herowncontributions,butalsototheMITcontributionstotheiraccount.Thisprovidesanobviousfinancialbenefittonewparticipants.Italsoprovidesbenefitstootherparticipantsoftheplanandeasesthemanagementoftheplanitself.Underthischange,theplanwillnolongerberequiredtotestpre-taxcontributionstoinsurethathigh-incomeindividualsarenotoverlyweightedintheplan.Therefore,therewillnolongerbethepossibility--ashasoccurredofcutbacksofthecontributionsofhighlycompensatedparticipants.(TheIRSdefineshighlycompensated.Theboundaryfor1999is$80,000.)3.1h)AdditionofNewAnnuityOptionsUnderthenewplan,MITwillcontinuetoofferitstraditionalannuityforthedefined-benefitportionoftheplan,foratimetobedetermined,subjecttoreview.MITwillalsoofferannuitiesatnegotiatedgroupratesfromoutsidecarrierstoprovideachoice.MITwillcontinuetotakeSupplemental401(k)/RPSMmoneybackintotheBenefitsFundtoprovideanannuityforthedefinedcontributionportionoftheplanusingthesameinterestrateassumptionsandmortalitytablesashavebeenusedinthepast.IfMITcontinuestooffersuchchoiceinannuities,thiscouldcreateanadditionalexpensetoMITsinceparticipantswilllikelymakethechoiceofanMITannuityonlywhentheMITrateismorefavorablethanthecommercialrate.TheissueofannuitiesisfurtherdiscussedinSection4andremainsafutureissueforthecommittee.3.1i)ProvisionforEarlyDistributionofPlanAssetsUnderthenewplan,distributionsofassetswillbeavailableatage591/2iftheplanparticipantisworkinglessthan50%time.Sucharrangementsrequiretheapprovalofthedepartmenthead.Onthedateaparticipantbeginsworkingatlessthanhalftime,theparticipantiseligibleforMITsubsidizedhealthinsurance,lifeinsuranceandotherbenefitsunderspecificconditionsspelledoutinBenefitsOfficedocuments.3.1j)ProposedEliminationofPost-TaxContributionsonJanuary1,2000Underthecurrentplan,contributionstotheSupplemental401(k)Plan(SP)canbeeither


onapre-taxorpost-taxbasis.Pre-taxmeansthatyoudonotpayfederalorstateincometaxesontheamountscontributedbutdopaythesetaxeswhenthecontributionsarewithdrawn.Post-taxmeansthatyoudopayfederalandstatetaxesonamountscontributed,butnotwhenthecontributionsarewithdrawn.MITproposestoeliminatepost-taxcontributionstotheMITRP.Asaresultofthischangetherewillbenoafter-taxcontributionswhichhavepreviouslybeensubjecttoFederaldiscriminationtests,designedtoensurethathigh-incomeindividualsarenotoverlyweightedintheplan.Therefore,therewillnolongerbethepossibility--ashasoccurred--ofcutbacksinthecontributionsofhighlycompensatedparticipants.ThisissueisfurtherdiscussedinSection4,futureissues.3.1k)Loansavailable(withIRSrestrictions)Loanswillbeavailableunderthenewplanforpurposessuchasthepurchaseofahome,educationormedicalexpenses.ThisshouldencourageyoungerparticipantstoputassetsintotheplanknowingthattheywillbeavailableunderIRSrestrictionsforotheruses.Undertheserules,aloanwillbeavailablefrom$1,000upto1/2ofthevalueoftheaccount,nottoexceedaloanof$50,000.Theloanwillhavea5-yearpaybackperiodandpayrolldeductionswillbeusedforrepayment.Alongerperiodforhomepurchasewillbeavailable.Spousalconsentwillberequiredtoobtainaloanfrompensionassets.Paymentofareasonableinterestrateisrequiredontheseloans.3.2ChangesEffectiveJanuary1,1999inTheBasicPlanThenoncontributory,definedbenefitportionoftheplanisreferredtoastheBasicPlan.Itwascreatedin1989withthemergeroftheRPEandcertainbenefitsfromtheRPSM.UndertheBasicPlan,aretireereceivesthelargeroftheannuitycalculatedusingtwodifferentmethodsofcalculation.(Thismaximumapproachisaconsequenceofthemergingoftwoseparateplansearlier.)Onecalculationisanannuityequalto1.65%ofthesumofsalariesreceivedinallyearsbetween1989andthedateofretirement,actuariallyadjustedtoprovidethefullbenefitatnormalretirementage(NRA).Thesecondcalculationistheannuitythatcouldbepurchased(givenannuitypricingatthetimeofretirement)bytheamountinanotionalorshadowaccount,whichiscreditedwith5%ofsalaryeachmonthandearnsanotionalrateofreturn.Todate,the1.65%calculationhasyieldedlargerretirementbenefitsforalmostallretireessincethismaximumapproachwasinitiated.3.2a)RevisionofCreditingProcedureforthe5%AccountInthepast,theinvestmentgrowthoftheFixedFundwasusedtodeterminethegrowthofthenotional5%account.(ThisaccountalsoreceivedamarketvalueadjustmentonDecember31,1998inthesamewayastheFixedFundasdescribedabove.)UnderthecurrentIRSregulations,thecontinueduseoftheFixedFundappreciation,asitismanagedbyMIT,isnotanoptionsinceIRSnowrequiresanarm'slengthmethodtocomputeaccountgrowth.Therefore,tocomputethegrowthofthe5%accountafterJanuary1,1999,MITmustselectsomemarketindexwhosegrowthisoutsidethecontrolofMIT.


TheCommitteemetwiththeTreasurer'sOfficeanddiscussedthisissue.TheTreasurer'sOfficeproposedatemporaryresolutiontocarryusthroughtheJanuary1,1999transitionwithfinaldetailstoberesolvedthisspring.InordertofilewiththeIRS(whichwasdoneinDecember),theTreasurer'sOfficehasselectedanexternalindexandamethodtocomplywithIRSregulationssuchasafloorandorsmoothingthatpreventsanydecreaseinthevalueofdefined-benefitassetsinthe5%account.TheTreasureralsoproposedthatbyadatecertainofMarch1,1999achoiceofindexandmethod(floor,smoothing)willbemadewitharetroactiveadjustmenttoparticipants'accountsiftheadjustmentispositive.TheCommitteeexpectstobeactivelyinvolvedinthisissue.SeeSection4.FutureIssuesforamorecompletediscussion.3.2b)ChangingoftheNormalRetirementAgefrom65to62UnderthecurrentMITPensionPlan,thenormalretirementdateisJuly1stfollowingthe65thbirthday.Anindividualretiringonthisdatewhofallsunderthe1.65%benefitreceivesthefullsumof1.65%ofsalaryasanannuity.ActuarialadjustmentsaremadeforindividualswhochosetoretireearlierorlaterthantheNormalRetirementAge(NRA.)TheExecutiveCommitteeoftheCorporationhasapprovedalimited-timechangetothenormalretirementage(NRA)from65to62,effectiveimmediatelyandcontinuingthroughDecember31,2003.ThiseffectivelybackdatesthecalculationofthepensionbenefitwithanNRAof62to1989.Thischangewillberevisitedbeforetheendofthefifthyeartoascertainwhethertheassetsoftheplancontinuetosupportthedecreaseinnormalretirementageto62andtodetermineifthechangehasresultedinanincreaseinfacultyretirement.Evenifthechangeisnotcontinuedpast2003thischangeprovidesanincreaseinthebenefitfromtheBasicPlan.Asaresultofthischange,participantsmayelecttoretireatage62andreceiveannuitybenefitpaymentsfromthe1.65%accountwithoutthecurrentreductionforearlypayment.Or,ifparticipantselecttoretirebeforeage62,thereductionforearlyretirementwillbelessthanitwouldbeifnormalretirementagewere65.Thebenefitunderthe5%accountisnotaffectedbythechangeinNRA.Thedecreaseinnormalretirementagefromage65toage62addsapermanentincreasetoallbenefitsearnedsincetheBasicPlanbeganonJuly1,1989(January1,1990forsomeunionmembers)andtoallbenefitsthatwillbeearnedaslongastheNRAof62isinplace.Ifthenormalretirementagerisesbackto65afterDecember31,2003,thehigheragewillapplyonlytobenefitsearnedafterDecember31,2003.Theeffectofage62normalretirementageonbenefitsearnedwhileitisineffectwillnotbelost.Forallplanparticipantsupontheirretirement,benefitswillbethesumofthebenefitearnedduringyearswhentheNRAwas62andthatearnedwhentheNRAwas65.Thus,thischangeincreasespermanentlytheBasicPlanbenefitforallparticipantsnomatterwhentheyretire.Thisoccursbecausethecalculationofbenefitforeachyearofemploymentwilluseanactuarialtableadjustedtoprovidethefullbenefitatthatyear'sNRA,withcorrespondingincreasesforthosewhoretirelater.


Inaddition,thischangeaffectstheCost-of-LivingAdjustmentsundertheBasicPlan.AfterBasicPlanbenefitpaymentsbegin,theywillincreaseonceeverythreeyearsasdeterminedbyacost-of-livingformula.Thefirstincreaseisscheduledthreeyearsafternormalretirementage.Bydecreasingnormalretirementagefrom65to62,thefirstcost-of-livingadjustmentforapersonwhoretiresatage62orearlierwouldbedueatage65,insteadofatage68asunderthecurrentplan.3.2c)BenefitsAccruedpastNormalRetirementAge(NRA)Toavoidagediscrimination,benefitsmustcontinuetobeearnedforparticipantswhoworkpastnormalretirementage.ThusduringonesworkinglifeatMIT,interestwillcontinuetobecreditedtothe5%Account.Andthe1.65%benefitwillcontinuetobeaccruedtoparticipants'accounts.The1.65%Benefitwillbeactuariallyadjustedforlatecommencementsothattheparticipantreceivesthefullvaluethatisintheiraccountatretirement.Theannuitypaymentswillbeincreasedtoreflectthelaterstart.4.FutureIssuesTheCommitteeplanstocompleteitsworkthisspring,withagoaltoproduceafinalreportbyApril1,1999whichwillincorporateallofourfindingsandconclusions.WehaveidentifiedseveralimportantissuesforfutureconcernthattheCommitteewilltakeupinsomedetailforitsfinalreport.Thesearediscussedbelow.Wewelcomefacultyinputontheseandotherissues.4.1Withdrawals,Annuities,andLumpSumDistributionsTodate,wehavefocusedonhowparticipantsandMITcontributionsarecreditedtotheplan,andhowtheplanandtheassetswillbemanaged.Alsoofgreatimportance,isthequestionofhowparticipantswillgettheirmoneyout.Formanyfaculty,pensionassetsrepresentanimportantpartoftheirtotalassets.Taxandestateplanningisacomplexareathateachindividualmustconsiderbaseduponhisorhersituation.QuestionstheCommitteewillexploreandlayoutforthefacultydealwithwhethertheMITPensionPlanwillallowtherangeofpayoutflexibilitywithitspotentialfortaxandestateplanningthatispermittedunderIRSregulations.Also,thereareseriousquestionsastowhetherMITshouldcontinuetobeartheriskandtheexpensetoremainintheannuitybusiness.ThisissueiscurrentlyunderexaminationbytheMITadministration.Wewillcontinuetobeengagedinthisissue.4.2Interestonthe5%AccountAsdiscussedinSection3.2a,undertheBasicPlan,aretireereceivesthelargeroftheannuitycalculatedusingtwodifferentmethodsofcalculation.Onecalculationisanannuity


calculatedbythe1.65%methodThesecondcalculationistheannuitythatcouldbepurchased(givenannuitypricingatthetimeofretirement)bytheamountinanotionalorshadowaccountwhichiscreditedwith5%ofsalaryeachmonthandearnsanotionalrateofreturn.Todate,the1.65%calculationhasyieldedlargerretirementbenefitsforalmostallretireessincethismaximumapproachwasinitiated.Nevertheless,itisappropriatetousegoodrulesforbothmethodsofcalculation.Inthepast,the5%notionalaccountswerecreditedwitharateofreturninthesamewaythatthefixedfundaccountswerecredited(asmoothedreturnandamarketvalueadjustmentatretirement).ThismethodisnotallowedbytheIRS,whichrequiresuseofarateofreturncalculationoverwhichMIThasnocontrolonceamethodisselected.Inaddition,thereistherequirementthatadefinedbenefitnotdecreaseinnominalterms,whichcanbeavoidedbychoosingaformulaforcreditingthe5%accountwhichneverresultsinanegativerateofreturn.Therearetwoissuesinpickinganotionalreturnrule.Oneissueishavingasuitableexpectedrateofreturn.Thesecondisusingaformulathatavoidsnegativeratesofreturnwhilepreservingroughlythesuitableexpectedrateofreturnfortheaccounts.Thereareseveralapproachesthatcanbetakentoaccomplishingtheseends.Oneapproachistoselectareturnindexthatisrarelynegative,suchastheyieldon10-yearTreasurybonds,andtoaddtoitafixedamount,reflectingtheexpecteddifferencebetweenthereturnsonaportfoliojustofTreasurybondsandadiversifiedportfoliothatmakesamoreappropriatechoiceofriskandreturn.Forexample,aportfolio40%instocksand60%inbonds(or50-50)mightbeappropriate.Onecouldtakethehistoricaldifferenceinlong-runreturnonsuchaportfolioandonTreasurybondsandaddthistotheTreasurybondsreturnindex(withthecreditedamountsubjecttoafloorofzeroreturn).Asecondapproachistobasethereturndirectlyontheindexassociatedwithasuitableportfolio(e.g.40%weightonthemonthlyreturnontheS&P500orRussell3000anda60%weightonthemonthlyreturnonanindexofalltaxablelong-termbondsoutstandinginthemarket,or50-50).Sinceanindexlikethisisveryvolatileonamonthlybasis,therewouldthenneedtobeasmoothingformulatocomplywiththenon-negativityconstraintandyetroughlyretaintheexpectedrateofreturn.Thereareseveralapproachestosuchsmoothingformulas.WhileMITdidneedtofileastatementwiththeIRSbeforetheendoftheyeardeclaringitschoiceofanindexandmethodofsmoothingforthe5%account,MIThasnotyetmadeaselectionthatismeanttoapplyforthelongerterm.Suchachoicewillbemadethisspring,witharetroactiveupwardadjustmentfortheearlymonthsoftheyearifthechoicehasahigherreturnthantheindexfiledwiththeIRS.ThecommitteeisdiscussingwithMIThowtoselectasuitableindexandsmoothingformulaandwillreportonthechoiceonceitismade.Thecommitteeisalsoconcernedthatthepresentmethodofcalculatingthe1.65%basicbenefitissubjecttoriskforparticipantsintheeventofsignificantinflationandthecommitteewantstoexplorewhetherthismethodshouldbemodifiedinthefuture.


4.3ProposedEliminationofPost-TaxContributionsonJanuary1,2000Underthecurrentplan,contributionstotheSupplemental401(k)Plan(SP)canbeeitheronapre-taxorpost-taxbasis.Manyparticipantsintheplanhavetakenadvantageofthisoptionandwillneedtoconsiderwhattheeliminationofthepost-taxoptionwillmeanforthem.Pre-taxmeansthatyoudonotpayfederalorstateincometaxesontheamountscontributedbutdopaythesetaxeswhenthecontributionsarewithdrawn.Post-taxmeansthatyoudopayfederalandstatetaxesonamountscontributedbutnotwhenthecontributionsarewithdrawn.Inboththepre-andpost-taxcasesallearningsarenottaxeduntilwithdrawn.Contributionstothe403(b)TaxDeferredPlan(TDA)canonlybeonapre-taxbasis.Theoveralllimitonpre-taxcontributionstotheSPandTDAcombinedis$10,000withsomeexceptions.MITproposestoeliminatepost-taxcontributionstotheMITRP.Asaresultofthischangetherewillbenoafter-taxcontributionswhichhavepreviouslybeensubjecttoFederaldiscriminationtestsdesignedtoensurethathigh-incomeindividualsarenotoverlyweightedintheplan.Therefore,therewillnolongerbethepossibility--ashasoccurred--ofcutbacksinthecontributionsofhighlycompensatedparticipants.Whywouldoneeverusethepost-taxoptionfortheSP?Underpre-taxtheearningsonamaximumof$10,000canbedeferredfromtaxation.Byputtingthemaximumallowedpost-taxcontributionof$8000intheSP,andthemaximumallowedpre-taxcontributionof$10,000intheTDA,theearningsonatotalof$18,000canbedeferredfromtaxation.Thiscanbeasignificantadvantage.Thereisanalternativeapproach.Put$10,000pre-taxintheSP.Thenbuyanafter-taxtax-shelteredAnnuity(TSA)for$8000onyourownfromanoutsideprovider(TIAA,forexample,sellsthem).TheTSAwillalsoshelterearningsfromtaxationuntilwithdrawal.Againyouwouldhavetheearningson$18,000deferredfromtaxation.Typically,TSAcontractshaveaninsurancecomponentthatguaranteesthatuponthedeathoftheinvestorallcontributions(notnecessarilyearnings)willbepaidtothebeneficiaryorestateeveniftheirmarketvaluehasdeclinedbelowtheoriginalcontribution.SometypicalcostsofthisinsuranceareTIAA(.23%),Vanguard(.38%),andFidelityInvestments(.80%or1.50%).FidelityInvestmentsalsoimposessurrenderchargesofupto7%duringthefirstfiveyears.AllthesefeesareontopoftheusualfundmanagementfeesthatareoftensomewhathigherforTSAplansthanforTDAplans.Formostpeople,thisinsuranceoptionisoflittlevalueandrelativelyexpensive.TDAsdonothavetohavethisinsurancecomponentandtherearemanyTDAoptionsatMITthatdonothaveinsuranceorsurrendercharges.Therefore,itismoreexpensivetobuyoutsideTDA'sratherthanstayinsideMITandbuyTDA's.Theabovediscussionimpliesthatthereisnoadvantagetoeliminatingthepost-taxoptionforSPcontributions.


However,thereisadrawbacktoallowingthepost-taxoptiontocontinue.Federallawsaysthatpost-taxcontributionshavetobemonitored(atsomecosttoMIT)toinsurethathighlycompensatedindividuals(incomesover$80,000)arenotover-representedamongallmembersusingthepost-taxoption.Iftheyare,thenthepost-taxoptioncannotbeused.Thismonitoringgoesonthroughouttheyearandthusthepost-taxoptioncouldbewithdrawnduringtheplanyear.Atthetimeofwithdrawalofthepost-taxoption,highlycompensatedindividualswouldhavetoreverttopre-taxcontributionstotheSPandthenmaketheirownoutside(e.g.,TSA)arrangementsforfuturepost-taxcontributions.Atthepresenttime,highlycompensatedindividualsarenotover-representedinthegroupelectingthepost-taxSPoption.ThissituationwilllikelychangewhentheBenefitsOfficeisabletocontactthoselowerpaidindividualswhomayhaveelectedpost-taxcontributionsbecauseofamisunderstandingoftheiroptions.TheCommitteewillcontinuetodiscusthisissuewiththeBenefit'sOffice.4.4ParticipantServices4.4a)CommunicationsTheBenefitsOfficehascarriedoutseminarsforparticipantsontheseretirementissues,andprepareswrittenmaterialintheformofannualreportsandinformationaboutchanges.Thisefforthasbeenincreasedinordertokeepparticipantsapprisedaboutthechangesunderwaynow.However,ithasbeentheexperienceofourCommitteethatagreatdealoftimeandeffortisneeded,giventhecurrentdocumentation,tomastereventheessentialdetails,jargon,acronyms,etc.thatareneededtounderstandtheplanandtomakeintelligentindividualfinancialdecisions.OnereasonforthedifficultyisthattheInstitutelacksthewrittenmaterialthatisneededtohelpbusyfacultyandstaffmemberslearnwhattheyneedtoknowtomanagetheirretirementaffairs.Thisinterimreportitselfisanindicationoftheproblem,intheamountofdescriptivematerialwehavehadtoincludeinordertosupportourviewofthechanges.ItisourviewthatinterestsoffacultyandstaffhavebeenwellservedbytheMITAdministration,inthewayithasmanagedtheplan,andperhapslackoffullunderstandingofitsdetailswerenotsocriticalintheyearswhenindividualchoicewaslimited.Withtheexpandedoptions,itisimportantforanindividualtounderstandtheconceptoftherisksassociatedwithinvestingaswellastheriskofinflationandtounderstandthebasicsofinvestingandassetallocationsothevalueofmaterialcarefullycraftedtoeducateparticipantsisgreatlyincreased.ThiswillbethecontinuingfocusoftheeducationalprogramsandresourcesthatwillbemadeavailabletotheMITcommunitywiththeassistanceofresourcesthatwillbeforthcomingfromFidelityandothers.OurCommitteewillcontinuetoworkwiththeBenefitsOffice,theTreasurer'sOffice,andotherpartsoftheAdministration,todiscusswhatisneeded,andtoseektheadditionalspecializedresourcestoproduceit.


4.4b)CounselingInthepast,members'assetswereinvestedandmanagedbytheInstitutethroughtheofficeoftheTreasurer.Consequently,theInstituteassumedfiduciaryresponsibilityfortheriskofavoidableunsatisfactoryperformance.AfterJanuary1,1999eachmemberoftheMITRetirementPlanisindividuallyresponsibleforthemanagementofhisorherSupplemental401(k)Planassets.TheBenefitsOfficeandFidelityInvestmentswillprovideinformationconcerninginvestmentrisksandreturns,butwillnotprovideinvestmentadvice.FidelityInvestmentshasmadeavailableamoneymarketfundaswellastwofunds,theFixedFundandtheVariableFundwhichareintendedtocontinuetheinvestmentstrategytheTreasurer'sOfficeemployedinthepastinexercisingitsfiduciaryresponsibilityforthetwofundsavailabletoparticipantsintheSupplemental401(k)Plan.TheyareintendedasinvestmentvehiclesforindividualswhoarenotexperiencedinvestorsandwhohavebeensatisfiedwiththepastperformanceofthefundsmanagedbytheInstitute.EachparticipantmustdecidewhethertheseClonedFundsaresuitableinvestmentvehiclesforthelong-termfuture.Thepossibilitiesforinvestmentofparticipants'fundsarevast.BeyondthemanyadditionalmutualfundsthatwillbeavailablethroughFidelityInvestmentsafterApril1999,theestablishmentofabrokerageaccountbyamemberwillpermitaccesstoanylistedmutualfundaswellastosecuritiesissuedbytheUnitedStatesTreasury.Individualswhoarenotexperiencedinvestorsshouldseekprofessionaladviceconcerningappropriateinvestmentassetallocations.TheBenefitsOfficewillhaveinformationavailableontheFixedandVariableFunds,themoneymarketfundandthe8-10corefunds.Fidelitywillprovideasoftwarepackage,calledPortfolioPlanner,toassistparticipantsinselectinganappropriatemixofinvestments.Thissoftwarepackagewillbepopulatedwithourselectionofcorefundstoaidindividualstoallocateassetsacrosstherisk-rewardspectrum.Ourcommitteewillcontinuetodiscussthisissue.


Appendix1:Glossaryofterms

1. Annuity:apromiseofincome,usuallyintheformofacontractthatguaranteesafixedorvariablepaymenttotherecipientusuallyatretirement.Inafixedannuitytheamountwillultimatelybepaidoutinregularinstallmentsvaryingonlywiththepayoutmethodelected.Inavariableannuity,thepayoutdependsonthevalueoftheunderlyinginvestments.

2. Annuitypurchaserate:meanstheinterestrateusedtodeterminethefactorforconvertinganaccountbalancetoanannuityincome.MIT'sinterestrateisthetrailing12monthaveragerateof10-yearTreasurynotesdeterminedquarterlyexceptthatitwillnevergoupordownmorethanone-quarterofonepercentfromtherateusedintheprecedingquarter.

3. BasicPlan:theMassachusettsInstituteofTechnologyBasicRetirementPlan,adefinedbenefitplanfullyfundedbyMIT.

4. BenefitsFund:thefundfromwhichallfixedbenefitsarepaid(includinganycostoflivingincreasesand,forcertainpeoplewhoweremembersoftheRetirementPlanforStaffMembers,thequalifiedspouseandearlyretirementsupplementbenefits.)AllBasicPlanBenefitsarepaidfromthisfund.

5. Bookvalue:referstoFixedFundaccountbalancespriorto1999.Contributionsandcreditedearningstoaccountsareknownasthebookvalueoftheaccounts.

6. BondIndex:aweightedaverageofthevalueofselectedbonds.7. "Cloned"funds:atermdescribingTheFixedandVariableFundsaftertransferto

FidelityInvestmentsmanagement.8. Definedbenefitplan:planthatpromisestopayaspecifiedamounttoeachperson

whoretiresafterasetnumberofyearsofservice.9. Definedcontributionplan:planthatpromisestocontributeaspecifiedamount.

Generally,eachparticipantdecideshowtoinvestfromamongoptionsoffered.10. ERISA:EmployeeRetirementIncomeSecurityAct,1974lawgoverningthe

operationofmostprivatepensionandbenefitplans.Thelaweasedpensioneligibilityrulesandestablishedguidelinesforthemanagementofpensionfunds.

11. ExpenseRatio:annualinvestmentmanagementfeeschargedtospecificmutualfundaccountsexpressedasapercentageofaccountassets.

12. FixedFund:aninvestmentoptionundertheSupplemental401(k)Plan.TheFundisabalancedfundconsistingprimarilyofbondswithsomestocks.

13. FixedFund"distributionrate":themonthlycreditedinvestmentreturntoaccountsintheFixedFund.Theratewasdeterminedbyformulaandreflectedallinterestanddividends,realizedandunrealizedgainsorlossesoncommonstocksandotherequitysecurities,andrealizedgainsorlossesonbondsandotherfixedincomesecurities.Tomaintainarelativelystabledistributionrate,gainsandlossesaredistributedoverfiveyears.

14. Index(associatedwiththe5%AccountMethod):--stilltobedefined15. IndexFund:mutualfundwhoseportfoliomatchesthatofabroad-basedindexsuch

asStandard&Poor'sIndexandwhoseperformancethereforemirrorsthemarketasawhole.Manyinstitutionalinvestors,especiallybelieversintheEFFICIENTMARKETtheory,putmoneyinindexfundsontheassumptionthattryingtobeatthe


marketaveragesoverthelongrunisfutile,andtheirinvestmentinthesefundswillatleastkeepupwiththemarket.

16. FundsNet:an"openwindow"tomutualfundsmadeavailabletoparticipantsbyFidelityInvestments.

17. IRS,InternalRevenueService:U.S.agencychargedwithcollectingnearlyallfederaltaxes,includingpersonalandcorporateincometaxes,socialsecuritytaxes,andexciseandgifttaxes.

18. Lumpsumdistribution:singlepaymenttoaparticipantorbeneficiarycoveringtheentireamountofanagreement.ParticipantsinIndividualRetirementAccounts,pensionplans,profit-sharing,andexecutivestockoptionplansgenerallycanoptforalump-sumdistributionifthetaxesarenottooburdensomewhentheybecomeeligible.

19. Marketvalue:fairmarketvaluepriceatwhichanassetorservicepassesfromawillingsellertoawillingbuyer.

20. MarketValueAdjustment:priorto1999,FixedFundAccounts,whentheyweredistributedorconvertedtoanannuity,werecreditedwithaone-timeadjustmentknownasamarketvalueadjustment.ThemarketvalueoftheFixedFundfluctuatesdailyandwascomputedmonthly.IfthemarketvalueoftheFixedFundwasgreaterthanthebookvalueofalloftheaccounts,themarketvaluewasdividedbythebookvalueandthispercentwasappliedtothebookvalueaccountbalance.ThiswasknownastheMarketValueAdjustment.Attheendof1998allFixedFundaccountswerecreditedwiththeMarketValueAdjustment.

21. Mark-to-market:adjustingthevaluationofasecurityorportfoliotoreflectcurrentmarketvalues.

22. MutualFund:fundoperatedbyaninvestmentcompanythatraisesmoneyfromshareholdersandinvestsitinstocks,bonds,options,commoditiesormoneymarketsecurities.Thesefundsofferinvestorstheadvantagesofdiversificationandprofessionalmanagement.Fortheseservicestheychargeamanagementfee.

23. NormalRetirementAge(NRA):aDefinedBenefittermreferringtotheassumedretirementageusedfordeterminingfullbenefits.

24. "OpenWindow":aninvestmentoptionwhichprovidesforaccesstoothermutualfunds.

25. Outsourcing:whenathirdpartydoestherecordkeepingofaretirementplan.26. RPE:theformerplanforserviceandsupportstaffortheRetirementPlanfor

Employees.27. RPSM:theformerplanforfacultyandstaffortheRetirementPlanforStaff

Members.28. Rollovers:movementoffundsfromoneinvestmenttoanother.Forinstance,an

IndividualRetirementAccountmayberolledoverwhenapersonretiresintoanannuityorotherformofpensionpayoutsystem.

29. Supplemental401(k)Plan:theMITdefinedcontributionplanthatincludesthecurrentSupplemental401(k)Plan,theformerRPSMplanaccountbalancesandthepre-74memberaccountbalancesundertheformerRPEplan.

30. S&P500Index:abroad-basedmeasurementofchangesinstockmarketconditionsbasedontheaverageperformanceof500(orS&P500)widelyheldcommonstocks.


31. Tax-DeferredAnnuity(TDA):asalaryreductionplanwhichallowsemployeesofnotforprofitorganizationstoelectasanalternativetoreceivingtaxablecashintheformofcompensationtocontributepre-taxdollarstoatax-deferredretirementplan.

32. TIAA-CREF:oneofthefourTDAcompaniesavailabletoMITemployees.33. VariableFund:oneoftheMITSupplemental401(k)Planinvestmentoptionswhich

investsinstocks.34. Vesting:therightanemployeeacquiresbylengthofservicetoreceiveemployee-

contributedbenefitsunderaretirementplan.35. 1.65%PayMethod:amethodfordeterminingBasicPlanbenefits.Underthis

method,youearnanannualbenefitequalto1.65%ofyourpayeachpayperiod.Thisannualbenefitiscalculatedassumingbenefitpaymentswillstartonyournormalretirementdateandwillbepaidforaslongasyoulivewithnosurvivorbenefits.

36. 5%AccountMethod:amethodfordeterminingBasicPlanBenefits.Underthismethod,abookkeepingaccountinyournameiscreditedeachmonthwithanamountequalto5%ofyourpay.ThisaccountisalsocreditedwithaninvestmentreturnbasedpreviouslyonthereturnforthePlan'sFixedFund,nowtobechangedtoanexternalindex.Whenyouelecttoreceiveyourbenefit,thebalanceinyourbookkeepingaccountisconvertedtoapension(anannuity)usingtheplan'sassumptionsaboutinterestratesandyourlifeexpectancy.

37. 401(k)Plan:asalaryreductiondefinedcontributionplanwherebyanemployeemayelect,asanalternativetoreceivingtaxablecashcompensation,tocontributepre-taxdollarstoaqualifiedtax-deferredretirementplan.

38. 403(b)PlanalsoreferredtoasaTaxDeferredAnnuity(TDA):aTDAisasalaryreductionplanfornotforprofitorganizationswherebyanemployeemayelect,asanalternativetoreceivingtaxablecashcompensation,tocontributetoatax-deferredretirementplan.


Appendix2:AnnualExpenseRatiosforVariousInvestmentOptionsStockFunds

FidelityBlueChipGrowth.72%

FidelityOTC.76%

TIAACREFStock.31%

VanguardIndexTrust500.19%

VanguardPrimecap.51%

VanguardWindsor.27%

VanguardWindsorII.37%

GrowthFundsAverage1.45%

Growth&IncomeFundsAverage1.27%BalancedFunds

FidelityPuritan.64%

TIAACREFSocialChoice.29%

VanguardWellesley.31%

BalancedFundAverage1.32%BondFunds

FidelityBondPool.20%

TIAACREFBondMarket.29%

VanguardTotalBondMarket.20%

VanguardGNMA.31%SpecialMITFunds

"Cloned"MITFixedFund.22%

"Cloned"MITVariableFund.28%

FidelityInstitutionalIndexS&P500.10%


Appendix3:ReviewOfThe"MarketValueAdjustment"IssueAsmentionedinSection3.1f,allFixedFundaccountsreceivedamarket-valueadjustmentbasedonreturnsthroughDecember31,1998,andonJanuary1,1999allparticipantaccountsweregivenamarketvalueadjustmentsothattheseaccountswillbeatmarketvalue.TheseunallocatedfundsweredistributedtoindividualaccountsinproportiontotheirassetvalueonDecember31,1998.Thisisequivalenttoallocatingthefundsasifeveryonewereretiringonthisdate.Somefacultyhaveraisedthequestionofwhetherthismethodofallocatingtheunallocatedfundsisfair.Therearetwowaysofframingthefairnessissue.Itisimportanttorecognizethatthesetwoapproacheshaveoppositeimplicationsforwhogainsandwholosesfrommark-to-marketonDecember31,1998relativetothefairnessconsideration.Onewayisbackwardslookingandisreallyreexaminingthehistoricalfairnessoftheexistingprocedure.ThiswayisbasedonaskingthequestionofthevaluethattheaccountswouldhavetodayiftheFixedFundhadbeenmark-to-markethistorically.Withahistoricalapproach,peoplewithlargeearlyaccumulationsrelativetorecentcontributionslose.Thesecondwayofframingthefairnessissueistoaskthequestionhowmark-to-marketchangeswhatwouldotherwisehavehappenedifthemethodsoftheFixedFundweretobecontinuedintothefuture.Thatis,ifweweren'tchangingtheFixedFund,thefairnessissueofnothavingmark-to-marketwouldprobablynotberaised,sincethatisthewaywehavebeentreatingeveryonewhoretires.Withaprospectiveapproach,peoplewhowouldhaveretiredunderthecurrentguidelineswithsmallaccumulationsrelativetotheirfinalyears'contributionslose.Thisforward-lookingapproachusesthecurrentplanasabaselineforfairnessconsiderations,whilethebackward-lookingapproachusesahypotheticalhistoryofmark-to-marketasabaselineforfairnessconsiderations.Aftersomedeliberation,theCommitteehasconcludedthatitisnotappropriatetorevisitthehistoricalworkingsoftheFixedFund.Moreover,theCommitteethinksthattheissueoffairnessasappliedtodepositsthatmightbemadeinthefutureisnotacompellingreasonforchangingtheproposedmethod.Moreover,thisprospectivechangeisjustonepartofmanychangesaffectingfuturedeposits.ThustheCommitteeconcludesthattheproposedallocationisappropriate.

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