In response to the financial uncertainty caused by the Covid pandemic, Michigan State University has reduced salaries and cut the match to employee retirement plans. Previously, the university contributed 10% to employee retirement plans if the employee contributed 5%. The university administration is calling the cuts temporary, in hopes of restoring the old plan match after the 2021 fiscal year.
The old match of 10% was extremely generous, among the highest retirement plan matches around, but that doesn’t ease the pain of seeing it go away. It also doesn’t decrease the anxiety about what it might mean for your retirement plans. Here are our financial planning tips to help faculty and staff affected by these cuts:
Tips for Managing the MSU Retirement Plan Match Reduction
#1. Don’t panic and keep perspective.
While this cut to benefits is drastic in percentage terms, a 5% match is still considered quite generous in the corporate world. The old match of 10% was unheard of outside academia. If you are relying on the school for your salary over the long-term, the financial health of the institution is important. A benefit reduction may be easier to cope with than more drastic salary cuts or downsizing. If you are near retirement, the additional match may not be as important as it seems to be. If you are early in your career there is time to make up the difference through prudent retirement planning.
#2. Take care of current needs first.
Review your budget and your cash flow. As we discussed in this earlier article about the MSU salary reductions, make sure your immediate needs are being met. Allowing missed payments and credit card debt to creep into the picture does not help your long-term financial health. Take care of business before looking for ways to shore up your retirement savings.
#3. Now is a great time to do a retirement projection.
Get a feel for how much you need for retirement and determine the right amount to save to get you there. Check out our SRB Plan Process if you want comprehensive help getting your finances in order. It is likely you will need to increase your contributions now to make up for the reduced match. However, it may not be necessary to try and cover the whole amount, and probably not all at once. Having a plan in place will help put the current cuts in perspective.
#4. Look for ways to increase your contributions.
Once your current needs are met and you have an idea of what you need to save you can look at your contribution. Ultimately, you are responsible for your retirement savings, and that responsibility has now gotten bigger. Too often employees decide that if their company is not going to match, or reduces their match, then the employee should stop contributing as well. This is counterintuitive and an excuse for inaction but is a very common sentiment. You need to look past that and take charge of your future.
#5. Keep your retirement account invested.
Moving retirement accounts into more conservative investments is a common reaction to market volatility and employment concerns, but this is generally a bad move. Even if you are near retirement, your portfolio will likely be invested for a long time, and short-term volatility is more of a distraction than a threat.
Managing Risk with the MSU Retirement Plan Match Reduction
At the same time, there are no short-cuts. If you were taking the appropriate amount of risk with your retirement portfolio before the reduction, taking more risk now seeking a better return is not a prudent way to make up for the lost contributions.
As part of the planning process, we discuss with you the amount of risk that makes sense for your circumstances. The goal is to take enough risk to ensure growth over the long-term, without taking too much risk so that you would be in danger of not making near-term goals.
If you are in doubt, consider using a target-date fund for your portfolio. Target date funds create a portfolio that is designed for employees retiring in a particular range of years. For example, the MSU plan includes the Vanguard Target Date Fund 2030, which is geared toward participants who anticipating they will retire around the year 2030.
We Are Here To Help
If you have been impacted by the Michigan State salary cuts and retirement match reduction and want help assessing the impact on your finances, reach out to our office. Our life planning approach to financial planning will help put these changes in the context of your overall situation, prioritize your financial choices, and get you on a path to success.