A Guide to Your 403(b), 457(b), ORP, and TRS
If you work for the University of Texas System, you've probably heard about TRS, ORP, 403(b)s and 457(b)s. But understanding what each program does is only part of the equation. The more important question is how those benefits work together to support your retirement.
For example, one of the most common questions we hear from UT employees is: “if I’m already saving for retirement through the Teachers Retirement System (TRS), why do I need to save anywhere else?” It’s a solid question, and one that many of your peers have asked. Frankly, TRS isn't designed to replace 100% of your pre-retirement income. Because your TRS benefit is formula-based, we can do the math: at TRS's 2.3% multiplier, you'd need more than 43 years of service credit to receive a benefit equal to 100% of your highest average salary.
With that in mind, the UT System provides several voluntary retirement benefits for you to choose from to supplement your TRS benefits. Your 403(b) and 457(b) can give you additional opportunities to save for retirement and build on the income you'll eventually receive from TRS. Rather than thinking of these programs as separate pieces, it can be more helpful to think of them as part of one overall retirement strategy.
Teachers Retirement System (TRS)
TRS is, at its core, meant to function like an old-school defined benefit pension that covers effectively the entire UT System with few exceptions. You automatically contribute 8.25% of your salary, pre-tax, for all pay periods on or after 9/1/2024. Once you retire, your TRS benefit becomes an automatic stream of monthly payments for the rest of your life.
The amount you receive isn't based on an account balance... it's determined by a formula that considers:
- Your length of service (also called "service credit");
- TRS's 2.3% multiplier; and
- Your highest average salary
TRS Annuity Calculation:
Total Years of Service Credit × 2.3% × Highest Average Salary ÷ 12 = Monthly Annuity Amount
Now, if you leave the University of Texas prior to retirement, you still have a few options. Option one is to leave TRS intact and simply wait to “turn on” benefits when you’re eligible to retire per TRS guidelines. Option two is to resume TRS contributions via another TRS-covered employer. And finally, option three is to request a refund of your accumulated contributions from TRS. Note however, TRS refunds are subject to a mandatory 20% federal tax withholding unless you roll over all eligible amounts to another eligible qualified plan or traditional individual retirement account (IRA). An additional 10% income tax penalty on early distributions may apply if you are under age 59 ½.
As for the role TRS should play in your overall financial picture, TRS is a source of money that you cannot outlive. That said, and as mentioned previously, unless you have more than 43 years of service credit, it likely won’t cover your entire retirement income needs.
The Optional Retirement Program (ORP)
ORP is a 403(b) retirement plan and is an alternative to TRS. In other words, you either participate in TRS or ORP – you cannot do both. Eligibility is determined by the job you perform and is not based on years of service or salary level. Positions that are generally ORP-eligible include:
- Faculty members whose duties include teaching and/or research as a principal activity
- Faculty administrators responsible for teaching and research faculty
- Professional librarians
- Chief and senior administrative officials
- Specialized professional positions (such as physicians, engineers, and attorneys)
- Athletic coaches and directors
Broadly speaking, you should be informed by your HR/benefits department about your eligibility when you are first hired. This is important because enrolling in ORP is a one-time, irrevocable opportunity. You only have 90 days from becoming ORP eligible to make the decision between TRS and ORP. If you don’t make a decision, the default is TRS.
Like TRS, your contributions are mandatory. However, you contribute less per pay period to the ORP account than you would have under TRS… currently 6.65% of your salary, pre-tax. The UT system then contributes an additional 8.5% on your behalf. From there, the money is invested and your eventual retirement income depends on the account balance you build and how you choose to use that money in retirement.
Unlike TRS, ORP does not have a guaranteed lifetime pension simply because you’ve accumulated years of service. The account itself is the retirement benefit. That means your investment choices and how you manage the account can have a meaningful impact on how much money you ultimately have available in retirement. And once the account is depleted, it’s done.
Should you leave the University System, you have similar options to TRS. You could leave the money in the account until retirement, roll the balance over to another qualified plan or individual retirement account, or withdraw the balance, subject to taxes and any applicable early withdrawal penalties.
It’s also important to understand the vesting rules for the UT System’s contributions. If you have been employed for less than “a year and a day” you will forfeit all employer contributions.
The Voluntary Retirement Plans: 403(b) and 457(b)
The 403(b) (“TSA”) and 457(b) (“DCP” or “Deferred Comp”) function essentially like a standard 401(k). You, the participant, can choose how much you contribute, what to invest in, and build an account balance over time. The major difference between a 401(k) plan and the voluntary plans available at UT is that there are no employer matching contributions.
These plans give employees another way to build their retirement savings beyond just TRS or ORP. They can also give you much more control over when and how you access your money in retirement.
These plans may have an annuity component to them, although not all the UT-approved providers have this option available. However, the amount of income you receive through the annuity is dependent on the account balance at the time of annuitization. It is not based on length of service, salary, or other factors used to calculate the TRS benefit.
If you leave the University you can still leave the money in either plan or roll the balance over to another qualified plan or IRA. However, your withdrawal (“cash-out”) options are different depending on which plan you participate in.
With the 403(b) you can withdraw the balance, but it will still be subject to taxes and a 10% early withdrawal penalty if applicable. With the 457(b), distributions generally are not subject to the 10% early withdrawal penalty, regardless of your age. You will still owe regular income taxes on taxable distributions. In most cases, this makes the DCP the more flexible of the two plans, if you separate from service prior to retirement.
In a perfect world, you wouldn’t need to touch the money in either account prior to retirement, but if you need a short-term bridge between jobs – the 457(b) can provide some additional flexibility.
How It All Works Together
At this point, you might be wondering how all these pieces fit together. The simplest way to think about it is that your UT retirement benefits are not necessarily separate plans competing with one another and one is “better” than the other... they are different pieces of your overall retirement strategy.
If you participate in TRS, you have a foundation of lifetime income that you cannot outlive. Your 403(b) and 457(b) can then provide additional retirement savings and give you more flexibility over when and how you access your money. If you participate in ORP instead, your ORP account generally becomes the primary source of your retirement savings, while the voluntary plans can give you additional opportunities to build on that balance.
The right combination will depend on your individual circumstances, including when you want to retire, how much income you expect to need, and how much you're able to save along the way. The important thing is to understand what each benefit is designed to do and how they can work together.
For UT employees, retirement planning isn't just about picking the right investment or contributing to the right account. It's about understanding how TRS or ORP, your voluntary retirement plans, Social Security, and your other assets can come together to create the retirement you actually want.
Frequently Asked Questions (FAQ)
Can I participate in both TRS and ORP?
No. TRS and ORP are alternatives to one another. If you’re eligible for ORP, you generally have 90 days to choose between the two. If you don’t make an election, TRS is the default.
Can I contribute to a 403(b) and/or 457(b) if I have TRS?
Absolutely! The voluntary 403(b) and 457(b) are designed to supplement your mandatory retirement benefits whether you’re participating in TRS or ORP.
What's the difference between a 403(b) and 457(b)?
Both plans are relatively similar and allow you to make voluntary contributions to invest for retirement. One of the biggest differences comes when you leave the University. The 457(b) generally offers more flexibility because distributions after separation from service are not subject to the 10% early withdrawal penalty, regardless of your age.
What happens to my retirement benefits if I leave UT before retirement?
This depends on which plan you’re participating in. TRS, ORP, the 403(b) and 457(b) each have different rules (see above) for leaving money in the plan, rolling it over to another account, or taking a distribution. It’s worth fully understanding your options before making a decision.
Do I need to contribute to a 403(b) or 457(b) if I already have TRS?
Not necessarily. But unless you work for a TRS-covered employer for your entire career its generally not designed to replace 100% of your pre-retirement income. The voluntary retirement plans can give you another way to build your savings and create additional income in retirement.
Is ORP better than TRS?
There isn’t a universal answer here. ORP and TRS are fundamentally different benefits. TRS provides a formula-based lifetime pension, while ORP gives you more growth potential via an investment account. Your career plans, retirement timeline, savings needs, and other assets all matter when evaluating the two.
How do I know which UT retirement benefits I should be using?
For most UT employees, the 457(b) is the logical place to start with your voluntary retirement contributions. Given its added flexibility if you leave the university prior to retirement, you can prioritize maxing out the 457(b) before directing any additional contributions to the 403(b).
Your TRS or ORP contributions are mandatory, so the decision generally isn't whether to participate, but how to build around the retirement benefit you already have.
That said, the right approach depends on your specific situation. Your eligibility, years of service, expected retirement date, income needs, current savings, and other financial resources can all affect how these benefits all fit together.
Ready to Take a Closer Look at Your Retirement Benefits?
Understanding TRS, ORP, and the 403(b)/457(b) is a good starting point. The next step is figuring out how those benefits fit into your overall retirement plan. If you're a University of Texas System employee and want to talk through your retirement benefits, we'd be happy to sit down with you. Our initial consultation is a chance to review where you are today, answer your questions, and identify any opportunities or gaps worth addressing.
Cetera Wealth Services, LLC is not endorsed by or affiliated with any state or other government entity.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
Cetera Wealth Services, LLC exclusively provides investment products and services through its representatives.
Although Cetera does not provide tax or legal advice, or supervise tax, accounting or legal services, Cetera representatives may offer these services through their independent outside business. This information is not intended as tax or legal advice.