When a new employee joins Northern Arizona University, one of the first financial decisions on the table is also one of the most consequential. Eligible employees have 30 days to choose between the Arizona State Retirement System, known as ASRS, and the Optional Retirement Plan, or ORP. If no election is made within that window, the employee is defaulted into ASRS, and that default is irrevocable.
That is worth reading again. The retirement plan election at NAU is not something that can be revisited next year when the picture is clearer. It is a one-time decision made, in many cases, during the first weeks of a new job when benefits paperwork is piling up and the full implications are not obvious. This article is meant to help NAU employees understand what each plan actually involves, what the plan documents say, and how to think through the choice practically.
Primary plan documents and resources:
- NAU Primary Retirement Plans overview
- NAU ORP plan details
- ASRS contribution rates
- ASRS benefit formula
- NAU supplemental retirement plans
The Fundamental Difference
ASRS is a defined benefit plan; retirement income is based on a formula. The ORP is a defined contribution plan; retirement income is based on account value. Under ASRS, the state manages the investments and absorbs the market risk. Under the ORP, the employee directs investments through Fidelity or TIAA and bears the investment risk.
How ASRS Works
The 2026-2027 fiscal year contribution rate is 11.98% employee and 11.98% employer, with 11.87% of each contribution being directed to the retirement plan and 0.11% being directed to the Long Term Disability Income plan.
The straight life retirement benefit (the baseline lifetime retirement benefit without beneficiary options) is calculated using a formula: Average Monthly Compensation X Total Service Credit X The Graded Multiplier. The graded multiplier increases with years of service, which means longer-tenured employees receive a higher benefit relative to their salary. ASRS is, by design, a plan that rewards staying.
The Average Monthly Compensation differs for those employed on or after 07/01/2011. For those employed prior to 07/01/2011, the average compensation is based on the average of the highest consecutive 36 months within the last 10 years. For those hired on 07/01/2011 and later, the average compensation is the average of the highest 60 months in the last 10 years.
For new ASRS members at NAU, contributions begin after a 183-day waiting period. For current members (such as members coming from previous employers like school districts, or AZ county or state employers) your contributions start at your hire date. Employee contributions are always 100% vested; however, if taking the refund option, employer contributions may or may not be vested depending on hire date and other factors. See more information here.
Both ASRS and ORP members may participate in ASRS or ADOA insurance options at retirement; however, ASRS Retirees with five or more years of credited service are eligible for a monthly premium benefit which ranges from $50 to $260 per month, depending upon years of service and coverage selected. The benefit applies for members enrolled in health insurance through the ASRS or non-subsidized coverage through their ASRS employer, and is not available with private or Federal Marketplace insurance plans.
Liquidity: As mentioned above, employees leaving the ASRS system prior to regular retirement have the option to “refund” their contributions along with interest. In many cases, employer contributions may be forfeited. For those leaving the ASRS system before retirement, the refund option is worth considering, as it allows the benefit to be rolled over to an IRA, tax free, and invested for future growth.
An often overlooked strategy is taking the Partial Lump Sum option at retirement. Members who are eligible to receive a monthly annuity can elect to receive up to 36 months of their pension payments as a lump sum at the time of retirement. This reduces the monthly pension for life, but it provides a pool of capital with real planning flexibility, including the ability to roll the lump sum to an IRA as a non-taxable transaction, use funds for Roth conversions, make Qualified Charitable Distributions, or leave to a named beneficiary.
This strategy can help hedge against risks such as inflation (as ASRS does not give cost of living adjustments), or losing hard earned retirement income in the event of early death. For members who have not been able to accumulate significant savings outside of ASRS, this option is worth understanding well before retirement. It requires thoughtful evaluation and carries its own trade-offs.
How the ORP Works
Both the employee and employer each contribute 7% of pay each pay period. NAU also pays for long-term disability at no additional cost. Retirement income is based on the total accumulation of funds in the account, including any investment gains or losses, just like with a 401k.
Employees choose between Fidelity or TIAA as their investment manager and direct their own investments. ORP contributions begin the first day of the pay period following the employee's election, without a waiting period.
Employee contributions are always 100% vested. NAU's contributions vest after five years of continuous service, or at age 65, whichever comes first. Immediate vesting may be available for employees who have an active retirement account from another institution of higher education.
The ORP is a portable plan. If an employee leaves NAU, vested account balances can be rolled to an IRA or a new employer's plan. ASRS, by contrast, is not portable in the same way. Leaving ASRS-covered employment before meeting retirement eligibility can significantly reduce or eliminate the pension benefit.
Some employees assume that choosing the ORP means giving up the certainty of a guaranteed income stream in retirement. In practice, an ORP account can be used to purchase a guaranteed annuity through an insurance company at retirement, providing similar income certainty if that is the goal. The difference is that the annuity purchase is a choice, not a structural feature. The ORP gives the employee more control over how and when that income is structured.
ORP members can enroll in ASRS medical, dental, and vision retiree plans, but are not eligible for the ASRS health insurance premium subsidy. That distinction in healthcare costs is a real long-term consideration, particularly for employees who plan to retire before Medicare eligibility at 65.
403b & 457: Underused Tools Worth Knowing About
Regardless of which primary plan an employee chooses, all NAU employees are eligible to contribute to both the 403(b) supplemental plan and the 457(b) deferred compensation plan. Both plans accept pre-tax and Roth contributions, and the contribution limits for each plan are separate. That means an employee can contribute the IRS maximum to both plans simultaneously, effectively doubling the tax-advantaged savings available beyond the primary plan.
The 457(b) plan is administered through Nationwide Retirement Solutions. This plan holds an advantage over the 403b in that there is no early withdrawal penalty for distributions, regardless of age. That is a meaningful distinction from the 403(b) and most other retirement accounts, which impose a 10% penalty on distributions before age 59½.
For higher-earning employees, the 457 & 403b are effective tax planning tools, as pre-tax contributions reduce current taxable income dollar for dollar. Combined with ASRS or ORP contributions, the total amount of income that can be sheltered from federal and Arizona state income tax in a single year is substantial. For faculty or administrators in higher income brackets, this is a strategy worth actively building into annual financial planning rather than treating as an afterthought.
For employees in lower tax brackets with extra cash flow, the 457 or 403b Roth options can provide tax diversification for future planning. If the funds planned to be set aside for the long term, the Roth option can provide tax free growth, rather than taxable growth in a brokerage account.
How to Think Through the Choice
There is no universal right answer between ASRS and ORP. The decision depends on factors that vary significantly from person to person.
How long do you expect to stay at NAU? ASRS rewards tenure through the graded multiplier in its benefit formula. The longer an employee stays, the more favorable the formula becomes relative to what an equivalent investment in a defined contribution plan might produce. Shorter expected tenure generally favors the ORP.
How much does the healthcare subsidy matter? The ASRS premium subsidy after five years of service is a recurring benefit that compounds over a long retirement. For employees who plan to retire before Medicare eligibility and who do not have other coverage options, that subsidy represents real money. ORP members do not have access to it.
How comfortable are you directing your own investments? The ORP requires investment decisions, which may add stress for some. Limited investment options coupled with lack of guidance can sometimes lead to frustration or fear of making the wrong decisions.
How important is portability? If there is any meaningful possibility of leaving NAU before reaching retirement eligibility under ASRS, the ORP's portability is a significant practical advantage.
What does the rest of the financial picture look like? Both plans limit contributions to the required amounts and do not allow additional voluntary contributions. The 403(b) and 457(b) provide the main opportunities for extra savings, and the greatest planning value comes from coordinating all of these accounts as part of one strategy.
A Final Note on Timing
Eligible employees have 30 days from their hire date to make the ASRS or ORP election. If no election is made, the employee is defaulted into ASRS, and that default is irrevocable.
Thirty days is not a lot of time to make a decision of this magnitude, particularly for a new employee who is simultaneously navigating a new role, new benefits, and a significant amount of paperwork. If you are an NAU employee working through this decision, or if you made the choice years ago and want to understand how it fits into your broader financial picture, we are happy to talk through it.
FAQ
Who is eligible for the ORP at NAU? The ORP is available to appointed staff, faculty, and service professionals. Classified staff are required to enroll in ASRS. (Source: NAU Human Resources)
What happens if I do not make a retirement plan election within 30 days? Employees who do not make an election are defaulted into ASRS, and that default is irrevocable. (Source: NAU Human Resources)
Can I switch between ASRS and ORP after enrolling? No. The retirement plan election is irrevocable once made or defaulted. (Source: NAU Human Resources)
Does the ORP include a healthcare subsidy in retirement? ORP members can enroll in ASRS medical, dental, and vision plans in retirement, but are not eligible for the ASRS health insurance premium subsidy of $50 to $260 per month that is available to ASRS members with five or more years of service. (Source: ASRS, NAU Human Resources)
What is the 457(b) plan and who can use it? The 457(b) is a supplemental deferred compensation plan available to all NAU employees, administered through Nationwide Retirement Solutions. It accepts pre-tax and Roth contributions, has a separate contribution limit from the 403(b), and carries no early withdrawal penalty for distributions taken after leaving NAU. (Source: NAU Human Resources)
