For over 35 years, M.C. Byrd Wealth Management has helped hundreds of business owners and professionals manage their portfolios and save for retirement. In 2015 we purchased a firm with a focus on the Texas Optional Retirement Program (Texas ORP) and since that point, we have helped over 100 faculty members with the Teacher Retirement System and the Texas Optional Retirement Program.
Who This Guide Is For
This guide is for faculty who are new to Texas and are trying to learn more about their retirement options.
Within the first 90 days of employment, new faculty must make a decision with regard to whether they should move forward with the Teacher Retirement System (TRS) or Texas ORP. This guide is meant to help new faculty better understand their options.
Is there a question you have that you don’t see answered here? Send me an email at [email protected] and we can add it to the guide.
Overview of Texas ORP
The Texas Optional Retirement Program (Texas ORP) is an alternative to the Texas Retirement System defined benefit plan.
In Texas ORP, employer and employee contributions are directed towards a defined contribution 403(b) retirement plan for eligible employees of public universities in the state of Texas.
It is available to most faculty members who are not members of the Teacher Retirement System of Texas (TRS). Through the Texas ORP, members and their employers make matched, tax-deferred contributions to one of the plans made available by the school.
How is Texas ORP different from the Teacher Retirement System (TRS)?
You can think of Texas ORP as being like a self-directed retirement plan where you invest in stocks and bonds. 403(b) just signifies that the plan is meant for non-profit and educational institutions, like universities and churches. Your retirement benefit will be based on your contributions, the state’s contributions, and investment earnings accrued within the account. Within ORP, like a 401(k), you assume responsibility for monitoring your own investments.
The Teacher Retirement System is a pension. In this plan, the state assumes investment risk on your behalf while making a promise to pay a particular amount upon retirement. This payment amount is based on a formula established by law. This formula takes into account your years of service and highest average salaries. You can find out more about that formula here. It should be noted that this amount is not guaranteed.
Benefits of Joining Texas ORP
Some of the benefits of joining Texas ORP include:
- Tax-deferred investment growth
- Tax-deferred investment growth is a benefit of joining Texas ORP because it allows members to invest pre-tax dollars in their retirement accounts, meaning they don’t have to pay taxes on the growth of the investments in their accounts until they start withdrawing funds. This can help members maximize their retirement savings, since the money they save in their accounts can grow over time, without being reduced by taxes.
- Shorter vesting schedule vs. TRS
- The vesting schedule for state contributions to Texas ORP is one year and one day. This is in contrast to the Teacher Retirement System (TRS) which has a vesting schedule of ~5 years. This makes Texas ORP appealing to university faculty who are not sure whether they will be employed with a state institution within the state of Texas within the next 5 years.
- Portability
- Unlike the Teacher Retirement System, faculty members are able to take their contributions with them. While your TRS benefit will be frozen dependent upon when you were last employed by the university, the Texas ORP benefit will continue to grow no matter where you’re located or employed.
- Inflation
- Portability can make a significant difference, particularly when you take inflation into account. For perspective, earning $100,000 in 2022 was equivalent to earning $38,820 in 1987 and a retirement benefit based on a salary earned at that time will reflect that.
- Relatively high match
- Texas ORP participants enjoy a state contribution rate nearly double that of the typical employer: 6.6% with the employee contribution rate at 6.65%. This compares to a typical match of 50 cents for every dollar contributed up to 6%.
- Professional investment management
- Depending on which vendor you choose, it may be possible for you to work with a personal financial advisor. Some vendors, like Pentegra, are especially beneficial for those who are looking for this style of management.
- Diversified investment options
- Many retirement plan participants in the U.S. are faced with a relatively limited menu of funds. Not so with Texas ORP. Your vendor selection will determine what kind of investment options you have, so be sure to evaluate the fund options you have with a particular vendor prior to joining. Fund options can range from a few dozen to several thousand depending on the vendor.
- Can pass on accumulated funds to beneficiaries
- The ability to pass on funds to beneficiaries helps ensure that the member’s loved ones are provided for after their death, as the beneficiaries will be able to access the funds in the member’s account. In TRS, the benefit must be reduced in order for a beneficiary to receive a benefit after the retiree’s death.
- Choice of investment providers
- Most retirement savers in the U.S. have the choice of one employer-based plan. Not so for new faculty members at most Texas universities. Provider availability varies by university, but typically faculty members have four or more options available to them, though there is at least one university in which faculty members only have one option available. Pentegra, the provider we typically work with, can be found within most Texas state university systems.
A choice of investment providers is a significant benefit of joining Texas ORP. Most employer plans only offer one investment provider.
Within Texas, ORP members can compare the fees, services, and investment options of different providers, a process we recommend prior to making a selection.
Some common providers at different universities include:
- Pentegra
- TIAA-CREF
- Fidelity
- AIG/VALIC
- Voya/ING
- MetLife
- Lincoln
Your university should have a list of providers available for you to evaluate along with representative contact information. Our firm is able to work with faculty within the Texas A&M system, the Texas Tech System, Sam Houston State University, and Texas State University.
As noted in the Texas Higher Education Coordinating Board Staff’s TRS and ORP comparison document, the Texas ORP can be especially beneficial for young people:
Because individual investments depend in large part on the passage of time to accrue meaningful returns, a defined contribution plan such as ORP generally favors the younger employee (and employees with prior participation in an ORP-type plan).
Benefits of Joining the Teacher Retirement System
The primary benefit of joining the Teacher Retirement System is the guaranteed benefit that will be there regardless of whether your money grows or not. According to the benefits handbook linked to below, that benefit is calculated like this:
Standard Annuity – This is the starting point for determining the amount of your service retirement benefit. It provides the maximum amount of benefit each month. If you select this form of payment, monthly payments end upon your death. No monthly benefit is payable to your beneficiary(ies). The standard annuity is calculated according to the benefit formula in state law in effect on the date of your retirement. The current multiplier set by statute is 2.3%.
TRS uses the following formula to calculate a normal-age monthly standard annuity:
1. Average of Highest Five* Annual Salaries = Average Salary
2. Total Years of Service Credit x 2.3% (multiplier) = Total %
3. Total % x Average Salary = Annual Annuity
4. Annual Annuity ÷ 12 = Monthly Standard Annuity
You can learn more in this TRS benefits handbook and these member education videos.
Eligibility Requirements
A. Who Can Join Texas ORP
New faculty members at Texas universities who are not members of the Teacher Retirement System of Texas (TRS) may be eligible to join Texas ORP. Eligibility requirements vary by university, so new faculty members should contact their university’s human resources department for more information.
B. How to Join/ Enroll In Texas ORP
To join Texas ORP, a new faculty member at a Texas university must submit your completed Election to Participate in Optional Retirement Program and/or Refund form (TRS 28) to your employer.
The university will provide the faculty member with the necessary forms and instructions for enrolling in the plan. The faculty member will then select an investment provider, make their contribution elections, and start contributing to their plan.
We typically assist new clients with this process.
Investment Options
The types of investments available within Texas ORP vary by investment provider, but will typically include a variety of mutual funds.
Prior to choosing an investment provider, it is important to evaluate the different investment options they have available.
In our experience, the size and quality of providers’ investment selection vary drastically.
For example, some providers may only have ~100 investment options made up primarily of funds managed by themselves. Other providers may have a more diverse selection.
You are not able to invest in individual stocks, individual bonds, cryptocurrencies, or ETFs with any provider within Texas ORP.
Contributions
A. How Much Can Be Contributed – Are There Restrictions On How Much I Can Contribute?
Your contributions to Texas ORP are fixed, meaning you cannot contribute more or less than the state requirement, and mandatory. The same is the case for members of the Teacher Retirement System.
According to the website of the Texas State Comptroller:
For employees participating in the Optional Retirement Program (ORP), the state contribution rate will remain at 6.6 percent for both fiscal 2022 and fiscal 2023. Employers are authorized to use local funds or other sources of funds to supplement the General Revenue Fund appropriation at a rate of up to 1.9 percent. The employee contribution rate will remain at 6.65 percent for both fiscal 2022 and fiscal 2023.
B. What if I want to contribute more to Texas ORP?
Contributing more to Texas ORP is not possible under current regulations; however, there is an option to contribute to a similar account in the form of Supplemental 403(b). It is a separate account, but from the standpoint of your investment options, it should look very similar. The only significant difference will be that the university will not match your contributions to the 403(b) supplemental account.
Withdrawing Funds
A. Rules for Withdrawing
The rules for withdrawing funds within Texas ORP vary by school and investment provider, but typically include a requirement that members not currently be employed at the school, be at least 59 ½ years old, as well as a 10% penalty for early withdrawals. Members with certain investment providers may also be subject to additional restrictions, such as a waiting period before withdrawing funds.
Those considering withdrawing funds should note that accounts cannot be reopened if you return to employment with a state-affiliated university in the state of Texas.
B. Tax Implications of Withdrawing – How Are the Benefits Taxed?
Withdrawals in retirement will be subject to ordinary income tax, regardless of age. Once one reaches the age at which minimum distributions are required (commonly termed RMDs) a minimum amount will have to be taken from the account every year.
C. Can I obtain a loan from my Texas ORP account?
No, members of Texas ORP are not able to obtain loans from their accounts. If you have a balance in a university-based Supplemental 403(b) account it may be possible to obtain a loan from your Supplemental account depending on conditions set by both the university as well as the provider you’re working with.
Frequently asked questions
What are the risks associated with investing in the Texas ORP?
The biggest risk incurred by faculty members investing in Texas ORP is market risk. There are several ways that faculty members can address this issue:
- Target date funds
- Using an advisor
- Closely tracking markets and managing assets
What types of withdrawal strategies are available through the Texas ORP?
There are a couple of ways that someone might elect to obtain retirement income through Texas ORP:
- Building a robust retirement plan using a financial advisor
- Electing to annuitize the 403(b)
In 95% of cases (if not more) we’re not a huge fan of option #2. Why? Annuitizing can be a very expensive option relative to option #1.
Some of the benefits of working with a financial advisor can include:
- sophisticated software that can run your retirement plan through a variety of scenarios.
- experience to guide you through the myriad questions that retirees face as they enter retirement.
How can I access my funds in the Texas ORP?
Like the Teacher’s Retirement System (TRS) if you are currently employed within Texas ORP you will not be able to access your funds for any purpose. If you have funds saved within Supplemental 403(b), a loan may be an option available to you depending on your eligibility and university rules.
Or if you have left employment with a state university in the state of Texas, those funds will be accessible. If you are under the age of 59 ½, early withdrawal penalties are assessed by the IRS.
Accordingly, if you’re looking to access your funds due to retirement it is important to make sure your portfolio is allocated correctly for your new stage in life. You may also have a wider investment selection available outside the 403(b) plan.
What are the associated fees for the Texas ORP?
Fees will vary by the provider chosen by the faculty member. Here are some of the fees you should inquire about from different providers:
- Insurance-based annuity fees
- Transaction fees
- 12(b)-1 fees
- Advisory fees
- Mutual fund fees
- Exit fees
Are there any age restrictions for participating in the Texas ORP?
No, there are no age restrictions for new faculty members who elect to participate in the Texas ORP.
What is the minimum balance required to participate in the Texas ORP?
There is no minimum balance required. Markedly this is a mandatory contribution per the state of Texas and all faculty members, regardless of initial balance, must either participate in Texas ORP or the Teacher Retirement System (TRS).
Can I invest in individual stocks, individual bonds, cryptocurrencies, or ETFs within Texas ORP?
You are not able to invest in individual stocks, individual bonds, cryptocurrencies, or ETFs with any provider within Texas ORP.
Choosing your retirement benefit can be overwhelming. If you’ve worked your way to this point of our guide you’ve taken an important first step towards making an informed decision.
No one retirement provider or system is right for everyone and we hope that our experience working with university faculty across the state of Texas has been of help to you.
If we can help make your decision between TRS and ORP or between ORP providers any easier, please send me an email at [email protected].
Resources for More Information
