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Optimal Option

SUNY's Personal Retirement Plan As a Model for Pension Reform

Complete report in PDF format
February 16, 2012


What you’ll learn from this report:

  • Defined-contribution plans are personal retirement accounts sup­ported by employer and em­ployee contributions. In contrast to traditional pensions, they can follow employees if they change jobs, and the pension account is usually not wiped out if an employee dies before retirement.
  • The State University of New York (SUNY) and City University of New York (CUNY) have offered a defined-contribution retirement option since the 1960s, and large majorities of professional employees in both systems have chosen it over the standard pension mandated for other public employees.
  • The SUNY and CUNY model, built on annuities designed to provide a stream of lifetime income, differs in key respects from a typical private sector 401(k) defined-contribution plan.
  • Defined-contribution plans are portable, allowing workers to take their benefits from one employer to another.
  • Governor Cuomo’s proposed Tier 6 pension reform would al­low new state and local government employees, including teachers, to choose defined-contribution retirement plans or a traditional defined-benefit public pension.
  • The baseline funding level of 4 percent of annual salary for the proposed defined-contribution plans is too low.
  • A new defined-contribution plan for state and local employees should require total contributions of at least 12 percent of salary, with employee shares matching the levels proposed under the governor’s proposed Tier 6 defined-benefit plan.
  • State officials need to give more careful consideration to defined-contribution plan design features to ensure that employees are provided with fairly priced investment and annuity choices tailored to their long-term goals.
  • The creation of a universal defined-contribution option for new state and local government employees in New York is a golden opportunity to create a national model for pension reform.




Navigate this Paper:



1. The Unsustainable Model


2. Choices for Higher Education Employees


3. Defined-Contribution Advantages


4. The Option Employees Deserve



Traditional public employee pension programs in New York State have become unaffordable for taxpayers—while denying workers the ability to choose more flexible approaches to retirement planning. 


But two of New York’s largest government employers are a notable exception to the rule. The State University of New York (SUNY) and City University of New York (CUNY) have long given their employees the right to opt into personal defined-contribution retirement plans. Large majorities of professors and professional staff in the two university systems have voluntarily embraced such plans since they were first offered almost 50 years ago.


As part of his proposed Tier 6 pension reform, Governor Andrew M. Cuomo would offer all new state and local workers the same kind of defined-contribution option.


Traditional pensions supply risk-free benefits under rigid formulas favoring long-term employees at the expense of those who prefer not to spend all or most of their careers with the same employer. The seemingly lower “normal” costs of public pension plans are misleading, made possible by government accounting standards that allow public pension systems to obscure their long-term liabilities.


By contrast, defined-contribution plans are financially transparent and predictable for employers, creating no liability for future taxpayers. While workers assume the market risk associated with funding their own retirements, they also gain the benefits of rapid vesting, portability to different employers and greater flexibility to shape financial plans in line with personal needs and preferences.


Critics have attacked Cuomo’s proposal by generalizing about the shortcomings of defined-contribution plans in the private sector, especially 401(k) accounts.  However, as this report explains, the SUNY and CUNY plans differ in crucial respects from a typical 401(k). They mimic a traditional pension by providing a stream of post-retirement income through private insurance annuity contracts. Annuities protect against the risk that retirees will outlive their savings—a key shortcoming of tax-deferred savings plans designed primarily to accumulate wealth. The Obama Administration has been seeking to encourage use of annuities as a way to help middle-class Americans save for retirement.


Data presented in this report include the average account accumulations of SUNY and CUNY participants in defined-contribution plans offered by Teachers Insurance and Annuity Association and College Retirement Equities Fund (TIAA-CREF). Even assuming low salary growth and investment returns in the future, university employees approaching retirement age have saved enough through their TIAA-CREF annuity plans, in combination with Social Security benefits, to replace nearly 70 percent of their final salaries in retirement.


In his 2012-13 budget presentation, Governor Cuomo said he was advocating “a voluntary option for a defined-contribution plan that follows the TIAA-CREF type model.”[i] However, his bill language does not go far enough to achieve that objective.  Recommendations for improving the governor’s proposal include the following:

  1. Raise the total funding level. The governor’s plan would require a minimum employer contribution of 4 percent, rising to 7 percent for employees who elect to contribute 3 percent of their own, bringing the total maximum savings to 10 percent. The minimum level will be tempting for many young and low-wage workers, but it would not provide the foundation for a secure retirement. Even a 10 percent savings rate would fall below the levels recommended by many retirement planning experts. The governor’s plan should be amended to raise the total contribution to a fixed 12 percent of salary, with mandatory employee shares of 4 to 6 percent depending on salary, as recommended on the defined-benefit side of Tier 6. The employer share would inversely range from 6 to 8 percent as necessary to bring the total to 12 percent. A contribution of 8 percent would still fall below the theoretical long-term expected cost of the current Tier 5 defined-benefit pension
  2. Create incentives to save more. The main retirement account created by the governor’s legislation should be coupled with a separate tax-deferred savings vehicle that takes advantage of the “auto-save” provisions of the 2006 federal Pension Protection Act, especially those allowing automatic escalation of contributions when pay increases.
  3. Pay closer attention to plan design details. The SUNY-CUNY plan is required by law to funnel deposits into annuity contracts. A strong preference for annuities— while still preserving individual flexibility to make lump sum conversions on retirement—should also be reflected in the legislative and regulatory framework for an expanded statewide defined-contribution plan. The state should also seek to bargain with financial institutions for low group fees on annuities and other products. During the savings accumulation phase, plan sponsors need to ensure that defined-contribution participants—especially young workers—do not automatically “default” to low-return vehicles such as money-market accounts, as is now the case in the SUNY plan.


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[i]2012 Executive Budget Presentation, Jan. 17, 2012. Webcast at