New Job Benefit Elections for Academics: What You Need to Know

The great news: You defended your dissertation, earned your Ph.D., and got a tenure-track job. Congratulations!! The slightly less good news: During your HR onboarding and moving process, you’ll be making a bunch of pretty consequential financial decisions that (like many new Ph.D.s) you may know very little about. But don’t worry: below, I’ll cover new job benefit elections for academics in their first full time position, offer good default recommendations on each decision, and link you to posts for further reading on each subject for all you nerds who want to do the extra credit. Let’s get started!

Retirement Plan Elections

Some Quick Terminology

  • A defined-benefit plan is what’s colloquially called a pension. There’s typically a vesting period (the minimum number of years you need to work for the employer/state before you’re eligible for retirement benefits) and thereafter a formula between your years of work, income trajectory, and the received benefit. If you leave or are let go before the vesting period is up, you can get a cash equivalent of the contributions made to the system in your name, but you may not have earned any interest on it.
  • A defined-contribution plan is a self-funded retirement plan consisting of a combination of investments that you self-manage. Often the employers will offer matching contributions on your (possibly mandatory) contributions to your account, with both your contribution and theirs expressed as a percentage of your salary. These will be invested in a 403(b), 401(a), or 401(k) tax-protected retirement account.

Options and Choices Vary

Notably, you may not have a choice. Some schools may offer only defined-benefit plans, some may offer defined-contribution plans, and some may offer both but they’re both mandatory. In those cases, obviously you enroll in the mandatory plan(s) as a condition of your employment.

Other times you do have a choice. This can also take a couple flavors. At my current university, they offer both a state-run defined-benefit plan with a vesting period of 10 years and a defined-contribution plan with a 5% (employee) : 9% (employer) matching contribution. You can choose either, but not both. But sometimes one is mandatory and the other is optional. For instance, a previous employer had a mandatory state defined-benefit plan (to which all employees had to contribute 6% of their salary) as well as an optional defined-contribution plan with a 5% (employee) : 5% (employer) match. In theory it could work the other way too (mandatory defined-contribution with optional defined-benefit), but I’ve never seen that one in the wild.

My Advice

Here’s my advice for each scenario where you have a choice:

  1. Mandatory defined-benefit, optional defined-contribution: Take the extra money — that is, enroll in the optional defined-contribution money. You should probably be investing at least that percentage of your income anyway, and in this case if you don’t, you’re effectively reducing your income by the amount of the employer match. Just take the free money and move on.
  2. Mandatory defined-contribution, optional defined-benefit: If you actually see this one, my advice is the same: Take the extra money. Typically employers contribute to as well as manage these funds, so the same logic applies as for the previous scenario.
  3. You have to choose one or the other: This decision comes down to your ability to peer into your crystal ball. Do you think you’ll stick around at least through the defined-contribution vesting period? How good is the employer match on the defined-benefit plan? How confident are you in the defined-benefit fund managers and your ability to invest?

For more on all of this, see Retirement Plans: Defined Benefit or Defined Contribution?

Supplemental Retirement Options

Common Account Types

Typically your university will sponsor additional account types for their employees. These take two major forms:

  1. Supplemental 403(b) contributions: Additional money you contribute to your 403(b) (or whatever) that is not matched by your employer but retains tax-protected retirement account benefits. Note: Your personal contributions to these accounts are subject to an annual limit (currently $22,500 for age<50 and $30,000 for age>=50) that includes your contributions to the defined-contribution match and your supplemental contributions. These are usually pre-tax but can sometimes be post-tax (Roth) contributions depending on your employer’s plan.
  2. Deferred compensation 457(b) contributions: These accounts are subtly different from 403(b)s and the like in that they are technically not retirement accounts — it’s just an agreement between you and your employer that you can take a given amount of your compensation in a (usually) pre-tax investment account, which you’ll collect and pay taxes on later. These can sometimes offer post-tax contributions as well. Also subject to an annual contribution limit (currently $22,500 for age<50 and $30,000 for age>=50). Your employer may offer contribution matches on this account as well, but it’s less common.

My Advice

Beyond any matches available in a defined-contribution retirement plan, my advice entirely depends on how long you think you will work for your current employer (or at all).

  1. If you want to work for your employer until at least age 59.5, I would make all my contributions to my 403(b) up to the annual limit before contributing to a 457(b) with any leftover funds. The reason is that 403(b)s have much more relaxed penalty-free access rules if you need funds while still with your current employer. It’s also simpler if you already contribute to it in a defined-contribution retirement plan.
  2. If you plan to retire early or would like to change jobs before age 59.5, I would max out my 457(b) before making additional contributions to my 403(b). The reason is that all restrictions on accessing these funds lifts as soon as you stop working for your employer where you made the contributions. This is obviously great if you plan to retire before age 59.5, or if you leave your employer and would like to use some of these funds for a house down payment.

For more, see Differences between 403(b)s and 457(b)s You Will Want to Know *when I finish writing it.

What Should I Invest In?

The short answer if you have no idea what any of those fund options are: Pick a lifecycle fund close to your anticipated retirement date and be done with it. These funds automatically rebalance your portfolio as you age to decrease your investment risk profile to maximize the chance that you get high returns early in life and protect your nest egg close to retirement. Set it and forget it for now, and if you ever want to take a little more control of your investments, you can do so any time (but I would do a lot more reading and thinking first).

If you want more control from day 1, I would recommend two resources with lists of reasonable, well-constructed portfolios:

  1. The Boggleheads forum Lazy Portfolio page. This is a set of investment portfolios that perform well under most market conditions and can also follow a set-it-and-mostly-forget-it ethos, though you may wish to rebalance every year or two. (FWIW, my asset allocation closely mirrors the Swensen lazy portfolio, except I shifted 1/3 of the bond allocation into small cap value stock index funds.)
  2. The White Coat Investor post on 150 different reasonable asset allocations. I would prefer some of these to others, but the key point there is you have a lot of options, and the best asset allocation is one you’ll stick with rather than lose expected profit through performance chasing (which often amounts to a buy high, sell low strategy).

For more detail on this and the previous section on tax-protected retirement accounts, check out Getting Started with Retirement Investments.

Health Insurance Elections

As with everything else on this page, you won’t always have an option. Most adjunct positions, for instance, won’t come with affordable access to employer-sponsored health insurance. If your position does, there may just be one option, and it may or may not be a good deal for you. If there’s just one option and it’s not unreasonable, just take it unless you have a family member who can include you in a better and more affordable family plan.

If you have options through your employer, it will typically be between a high deductible / HSA and low deductible / FSA plan. Often if you run out the numbers, you may find that the high deductible plans are the best bargain, whereas with a low deductible plan you essentially pay for cost certainty. If that’s the case for you, I recommend setting aside cash equal to at least your deductible and using this money to cover your medical expenses as they arise.

If you want to make sure you are choosing the best option, I would collect a list of all the insurance plans you are eligible (your employer’s, your family members that could cover you if any, and anything available on the Obamacare marketplace), and make a list of the following numbers:

  1. Monthly premiums: This is how much you pay monthly out of pocket to be part of the plan. (Note, these payments are tax-deductible.)
  2. Deductible: This is how much you have to pay out of pocket before your insurance benefits kick in for non-preventive care.
  3. In network out of pocket max: This is the most you will pay out of pocket in a year for covered medical care. (Note there are often exceptions for care with capped lifetime or annual coverage, such as for assisted reproductive services. Any expenditures beyond these covered caps are entirely your responsibility regardless of your out of pocket max.)
  4. Co-pays on covered visits, procedures, and generic pharmaceuticals: This is how much you’ll pay for services that are covered by your insurance (often after your deductible).
  5. Other notable coverage that you anticipate needing. For instance if you’re pregnant or want to be, you should obviously check out coverage for pregnancy, delivery, and postnatal care.

Once you have this information in front of you in one place, your options should be much clearer. It will sometimes be easy to choose. If not, I recommend setting an appointment with HR to more comprehensively discuss these options.

For more, see High or Low Deductible Health Insurance? HSA or FSA?

Life Insurance

Your school probably offers term life insurance. There will often be a default, basic coverage (at my school it’s $50,000) that will basically cover funeral costs. If you want more than than that, you’ll need to pay for it. Plans will often be available covering you up to a certain multiple of your salary, and your premiums will be based on your age and how much coverage you want.

My advice on this issue effectively comes down to the number, employment status, and ages of your dependents. If you have no dependents, I don’t see much benefit in paying for term life insurance. If you have several young children and are either a single parent or have a spouse/partner who doesn’t work, I would want the absolute maximum available. Probably something in between if your spouse/partner has a good-paying job and/or your children are older.

For more, see Should I get Life Insurance, Disability Insurance, and Renter’s Insurance?

Disability Insurance

Your school probably also offers short- and long-term disability insurance. As the names suggest, short-term disability insurance covers periods where you’re unable to work for <6 months, and long-term disability insurance covers periods where you’re unable to work for >=6 months. This insurance will cover a percentage of your salary until you’re able to return to work, if you are.

As a young academic, I recommend you don’t get short-term disability insurance. You’re likely young and on the healthy side, and the premiums for this insurance are often quite high. Besides, if your school is like those I’ve worked at, there are often ways to cover your work during a health event — for instance, a TA or colleague could temporarily cover your classes, or you might teach temporarily over Zoom. I used a combination of these strategies when I had a bad case of bulging disc. Neither I nor any of my colleagues in these situations have ever had their pay withheld to my knowledge. Even if your university is run by a bunch of assholes, you can cover this scenario through a well-funded emergency fund instead of paying a premium to an insurance company for essentially the same thing.

However, you should consider long-term disability insurance. As an early career academic can’t self-insure for decades of lost earnings if something terrible were to happen to you (unless you’re already financially independent). I also wouldn’t wait: when I recently applied for LTDI, I was denied based on a history of depression and the aforementioned spinal issue. I’m going to try again and see if I can be covered with carveouts for these issues, but it’s a more difficult row to hoe. I’d get covered while you’re young and healthy if possible.

For more, see Should I get Life Insurance, Disability Insurance, and Renter’s Insurance?

Home Buying vs. Renting

Most of us have been told from a young age that homeownership is the best path to wealth, the emblem of the American dream, and a critical marker that you’ve ‘made it’ as an independent adult. It’s true that homes make up the majority of Americans’ wealth (which is a key driver of racial/ethnic wealth disparities due to long histories of racist policies), but that’s mainly because our savings rate in retirement accounts is terrible. Still, it can make sense to buy a home for several reasons I’ll discuss in a future post. For now, my advice on this issue is to cool your heels on buying a home right away for several reasons.

  1. Many starting assistant professors will change jobs within the first few years. Due to the high transaction costs of buying and selling a home, this means that home buying can often be a financial loser.
  2. You probably don’t have a 20% down payment saved up, which means you may be able to get a mortgage, but you’ll likely have to pay private mortgage insurance (PMI), in which you effectively pay additional interest to your lender with no corresponding increase in paid off principal. It’s often better to rent and save up for this down payment.
  3. You’ll have a better idea where you want to live after a couple years. Once you have the lay of the land, you’ll better know which neighborhood you’d like to put down roots in. And if you work in a college town, the housing market is often very seasonal (concentrated in spring), so you can often find good deals during the off-season if you already live in town.

In short, I suggest renting for at least a year or two, saving up for your down payment, getting the lay of the land, and getting a better idea of how long you’re likely to stay before you pull the trigger.

Final Thoughts

People take a lot of different paths to their Ph.D., but among the most common in many fields is to apply for graduate school straight out of undergrad. This has the effect that many newly-minted Ph.D.s come to their first academic job with no experience navigating benefit elections, and these decisions often come at the same time they are buying or moving into a new house, trying to finish their dissertations or otherwise keep their research agenda afloat, relocating their families, and doing a million other things that leave them with little time and energy to give themselves a crash course on all of these issues. Hopefully if this describes you now or in the future, this post helps you muddle through until you have a bit of breathing room!

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