Draw Them In
Streamlining investment options is one incentive for taking part in an employer-provided retirement program. In this panel discussion, higher education leaders outline other decisions plan sponsors can make to engage employees and ease administrative oversight.
The responsibilities associated with sponsoring retirement plans have grown significantly more complex in recent years. As a result, colleges and universities are grappling with a multitude of decisions in connection with their programs. (Read "On Track & On Time" in the April 2013 issue of Business Officer for details on retirement plan compliance issues and ways institutions are addressing them.) Business Officer recently engaged several higher education leaders with oversight of their organizations' retirement programs to hear how they are addressing a key concern of increasing employee participation. Included in this panel discussion are Bob Huth, vice president for business and chief financial officer, Stetson University, DeLand, Florida; Betsy Rodriguez, vice president for human resources, University of Missouri System, Columbia; and Andy Brantley, president and chief executive officer, College and University Professional Association for Human Resources (CUPA-HR), Knoxville, Tennessee.
First, can you provide a broad overview of your institution's plan?
HUTH: Stetson University has a defined contribution plan with a 10 percent pension contribution on base salary with no required employee match. Employees are automatically enrolled into life-cycle funds. We have a one-year waiting period unless an employee transports a plan from another institution. After phasing out several other providers, we are moving toward having one active provider—TIAA-CREF—where all current contributions for new employees go.
RODRIGUEZ: At the University of Missouri, we administer a defined benefit plan that we've had in place for more than 60 years. This plan is managed within the UM system and is not part of a state retirement plan. As part of a massive restructuring of our retirement program, in 2012, we changed our retirement benefit going forward for new employees only. We essentially created a hybrid plan that combines our defined benefit program with a defined contribution program similar to what many higher education institutions offer. We are now managing this hybrid plan for new employees while maintaining the defined benefit program for employees who were already enrolled.
Employees—new participants as well as formerly enrolled—make a 1.5 percent contribution to the defined benefit plan and the university funds the remainder, which varies each year based on an actuarial valuation but has been as high as 11 percent in recent years. For the defined contribution component of the new plan, UM contributes a base of 2 percent of salary and matches 100 percent up to 3 percent of employee contributions. New employees default to the maximum match.
We also offer a variety of voluntary retirement savings programs—403(b), 457, and 401(a) plans—which we recently restructured by consolidating 10 voluntary tax-deferred plan vendors into a single platform with a master administrator.
What are the benefits of moving to a single record keeper?
BRANTLEY: Purely from an administrative standpoint, moving to fewer carriers is more straightforward and definitely easier to manage, given the increased fiduciary and recordkeeping responsibilities. This is particularly true for smaller institutions that are pulled in many directions and that may have only a handful of staff who manage these plans. While the single record keeper is a growing trend, CUPA-HR's 2012 survey of college and university benefits programs did indicate that nearly half—48 percent—of higher education institutions currently use more than one retirement services provider.
"Purely from an administrative standpoint, moving to fewer carriers is more straightforward and definitely easier to manage, given the increased fiduciary and recordkeeping responsibilities."
Andy Brantley, CUPA-HR
Another overarching highlight of interest is that slightly less than half of the institutions responding to our survey have a defined benefit plan. The overwhelming majority of those plans are at institutions that are state-supported or state-funded in some way and are not typically run by the university. [See sidebar, "Retirement Plans By the Numbers."]
RODRIGUEZ: Consolidating to a single master administrator enabled us to leverage enormous savings in fees to participants while increasing services and communication to employees. One important distinction to make is between having a single record keeper and having a single-provider investment option. For example, we use Fidelity as our sole record keeper, but we have maintained a platform of investments that we consider best-in-class that includes some Fidelity funds along with funds from other providers, and we also offer employees access to TIAA-CREF funds.
Speaking of investment options, how have your institutions addressed the issue of employee choice while also attempting to alleviate investment risk in the options you offer?
HUTH: We have about 40 investment options overall, 11 of which are life-cycle funds. For some employees, including relatively novice investors who don't put as much thought toward their retirement, life-cycle funds become a good option. For others who take a more active role in designing their retirement investments, we recently added several diverse funds to our portfolio, including alternative, commodity, and international debt offerings. These have been well received by a portion of our retirement accumulators.
RODRIGUEZ: We offer 25 investment options, plus target date funds. That's down from about 800 funds 10 years ago. This past year when we added a defined contribution component to our retirement plan, we went through a huge process of streamlining investment options, which are now the same for all employees and across all defined contribution plans. With the help of a consultant, and with faculty and staff input, we selected about 10 investment classes, including funds that are lifestyle and life-cycle based.
By streamlining options and maintaining our focus on offering best-in-class in each of these categories, our hope is to get employees to think less about the provider and more about the level of risk that makes the most sense for them. By far the majority of our employees—more than 80 percent—select the life-cycle funds.
And have you experienced any backlash in response to reducing investment options?
RODRIGUEZ: First, I think it is worth noting that there is research to suggest that when people have fewer options, more are more likely to invest. Many people simply get overwhelmed when there are too many options to choose from. So, on some level we may actually be helping people to save by reducing their choices.
That said, we did not undertake this streamlining process in a vacuum. We have a faculty and staff group with whom we work who were worried that our best-in-class approach would translate into a loss of choice. However, they were equally concerned about our low participation rate. By our calculations, less than 15 percent of our employees were taking advantage of our optional plans. As we worked with this faculty and staff group to educate them about the plan redesign, they quickly figured out that streamlining investment options and providing better communications and transparency about things like fees would help get more people in the plan. And in fact we've had a significant jump in enrollment since we made these changes. We are now at over 20 percent participation in our optional plans after only six months.
What about automatic enrollment and other plan design features to boost employee participation and savings? Have these worked for your institution?
HUTH: We automatically enroll all new employees into the life-cycle funds in our plan, requiring employees to opt out. Since establishing automatic enrollment three years ago, no one has opted out of the plan. About a month prior to an employee's one-year anniversary, we send a sign-up packet. If the employee fails to complete the forms, a retirement contribution is sent for the employee's first eligible pay period into an age-appropriate life-cycle fund. We have found this to be very effective in ensuring our employees get a good start.
"An institution's defined contribution rate is an important thing to benchmark to maintain hiring competitiveness."
Bob Huth, Stetson University
RODRIGUEZ: We had a huge debate about automatic enrollment [into the matching contribution] as part of our restructuring process. As we talked about how best to get people to contribute to the defined contribution plan, we decided to default employees at the 3 percent level, regardless of salary range, and then require them to opt out. While our default process is relatively new, so far more than 90 percent of new participants remain at the auto-enrolled, 3 percent level.
We also switched from flat-dollar contributions to contributing a percent of salary. We used to allow both, and that was a convenience factor for employees. However, with our new system we can use only one approach, and we deliberately selected the percent contribution because this tends to translate into greater savings for employees over time. This also provides a better tie-in to messages on specific events such as percentage salary increases.
Given the increased fiduciary role for institutions, what level of involvement and oversight have you sought from your board or investment committee, or externally?
HUTH: The fiduciary is the senior administration and the investment committee of the board. We currently review our fees once a year and do the 409(a) proscribed communications with individual participants. We started to review performance annually and are looking at doing that piece more frequently. We have an investment policy that we've created for the 403(b) and 457 plans that we offer.
We are trying to keep this relatively simple as far as having a group at the university that is attuned to issues of investment, fees, performance, and the like. In addition to what's required from a fiduciary standpoint on the 403(b) and 457 plans, our investment committee provides oversight for the university endowment. We are using our investment adviser to help the committee become more comfortable with its fiduciary role. At some point we may go to a cofiduciary model, but we felt comfortable getting started this way with our own investment committee. From a fiduciary standpoint, we recognize that the most important things are to have a policy, follow the policy, and document what has been done.
RODRIGUEZ: We have also tried to streamline the process. Our defined benefit plan clearly falls under the fiduciary responsibility of the board. For our defined contribution and our optional retirement plans, we have an investment policy and philosophy such that the board allows an investment committee—composed of myself, our chief financial officer, our treasurer, and the associate vice president of total rewards—to oversee the plans with advice from an investment consultant. This committee meets quarterly. So, for instance, when funds don't seem to be following their original intent, or for basic administrative components of the plan, our committee fulfills that oversight role.
"We still face a huge uphill battle in getting people to appreciate the value of their core retirement plan."
Betsy Rodriguez, University of Missouri System
We also have a retirement and benefits committee, a long-standing faculty and staff group that has worked with us on plan design and communication issues. Since many of those folks have served on that committee for years, they are well-educated on the issues. Even so, we are very clear with them about what they can and can't do. By the same token, keeping them involved and active in the messaging of the program has really helped us address the wider group of faculty and staff who don't understand some of the reasons behind the changes we have made.
BRANTLEY: Broadly speaking, most higher education institutions have followed the examples Betsy and Bob have laid out. As you can imagine, from a board of trustees standpoint, having the appropriate policies and procedures and the right checks and balances in place are really important. My advice would be to not let the board choose investment mixes or make those types of decisions. They should trust that the leadership of the institution is doing what they're supposed to in their fiduciary role.
To shift gears from reporting to the board to communicating with employees, how are you helping faculty and staff think about their retirement readiness and encouraging their participation in your retirement program?
HUTH: Until the past five or six years, there was no overarching recognition of an institution's fiduciary responsibility toward these plans. The employer responsibility was essentially to offer a plan, and it was largely the responsibility of the employee to determine what to do with it. All this has changed dramatically. Although the institution cannot dictate whether or where employees should allocate their resources, one best practice is to make sure that what you offer employees has reasonable fees and provides solid performance, however those are defined.
As a plan sponsor, it is also now incumbent upon the institution to make sure that educational opportunities are available to support employee retirement decisions. At Stetson, employee communication is an area we definitely want to make more robust going forward, and we are in the process of developing a broad plan, but at this point, we are relying rather heavily on our provider. Currently, our provider holds quarterly individual education sessions on a reservation basis coordinated by them. This has led to the use of a waiting list for following quarters when the sessions are full.
Although there is Web site information available, I will be working with both the service provider and our HR staff to determine how we can be more proactive with employee education. One benefit in having a single provider is that it will allow us to have a more streamlined approach to the education we provide employees.
RODRIGUEZ: Going to a single record keeper has been a big bonus for us as well, with regard to our employee communication. Because the fees overall are lower, we are able to leverage more resources toward education. We provide a lot of information online and through one-on-one consultations with our provider. We are testing some social media, but we've only put our toe in the water with this. During the transition in 2012, our goal was to touch every employee with the message. This year, we are focusing on four segments of our employee group with specific and targeted messages. We will continue to do broad-based education as well.
While we're trying to use all the communication vehicles that we can, the truth of the matter is that this is new territory for many higher education institutions. A really strong communication program requires resources, and so we're all extremely careful when it comes to spending money in this area—especially those of us managing public plans.
Despite constraint of resources, will a more intentional segmented approach to messaging be increasingly important going forward?
BRANTLEY: When it comes to retirement planning, there definitely is not a one-size-fits-all solution. As we think about the different employee populations—not only by various demographics, but also by salary levels and life stages—there are many different needs with regard to optimizing what a retirement plan might look like for someone. Some providers have done a pretty good job trying to tailor resources to different audiences to help employees focus on what makes sense for them individually, but this segmenting of your communication strategy is an ongoing dilemma for higher education overall.
RODRIGUEZ: I absolutely agree. As is the case for most institutions, we have a significant number of lower-paid employees who do most of the support work for our institutions. These folks are at salary levels that make it quite difficult to engage them in retirement conversations. Many of them may be working more than one job and do not feel like they have any disposable income to devote to retirement savings.
Contrast this group to faculty, who tend to stay in one career track for a lifetime and with whom it is easier to establish expectations about investment growth over time. Then there are our nonfaculty employees who may not only change jobs but change careers multiple times, and this adds another layer of complexity to retirement planning and employee education and communication.
So how do these layers of complexity factor in to identifying your overall plan goal and priorities, and what you ultimately offer in plan design?
HUTH: What an institution should try to accomplish with its retirement program can be tough to quantify in the context of today's workforce. This may be easier with a defined benefit plan, but when you consider a defined contribution plan, which by its nature is supposed to be portable from one workplace to another, it's difficult to assess how what you offer actually integrates with any individual's long-term retirement goals. Other than faculty, fewer and fewer staff appear to spend their entire careers at one institution. An institution's defined contribution rate is an important thing to benchmark to maintain hiring competitiveness.
BRANTLEY: As institution leaders consider the goals for their plan, it's important to remember that you will always have a handful of people in the organization who want some rather outlandish options that very few people would ever take advantage of. So it's incumbent upon the investment committee and for higher education HR professionals and chief business officers to think in terms of what it is that we offer that provides the maximum opportunity for the majority of employees for retirement security and that, at the same time, doesn't open the floodgates in terms of the responsibilities required to manage and monitor those funds on an ongoing basis.
What do you foresee as future requirements or forces continuing to shape the fiduciary and communication roles for higher education plan sponsors?
RODRIGUEZ: Two words: Flexibility and technology. I think plan design must remain fluid and understandable, especially as people bounce from employer to employer and career to career. This mobility means that employees want access to information at any time and through a variety of venues. And this will continue to pose a huge challenge, especially with regard to resources. But we also have to understand that people who come into higher education from other employment sectors have big expectations about access and flexibility.
HUTH: I also have to wonder if what we'll see going forward is a reduction in employer contributions to these types of plans, or at least a transfer of some of the contribution requirement to employees. We already see a lot of transformation and reduction within industry in reducing the 401(k) and matching contributions. Because of the competitive marketplace for employees, for the most part higher education defined contribution plans remain higher than commensurate defined contribution plans in other marketplaces.
And yet, I think the business model of higher education and the associated costs of these plans will at some point necessitate changes in plan design that require greater participation from employees.
BRANTLEY: To build on what Bob has suggested, if you think about some of the transitions that we've seen in health care, there remain few higher education employers that continue to pay the full cost of premiums for their employees. Most colleges and universities require that employees pay at least some portion. Yet, by having a retirement plan where the employee does not have to interact in terms of some sort of contribution—in some instances, no contribution may even be required to get the match—this makes employees more passive about their retirement goals.
As we have witnessed with health care, more skin in the game typically means greater awareness of the benefit. Some employers have been forced from a recordkeeping standpoint to have their plans require a contribution amount based on what the institution pays, but this is by no means taking place across the board. In the same way we have made some of these transitions with our health-care plans, it's time for us to strongly consider what greater employee participation looks like for our retirement plans.
RODRIGUEZ: I couldn't agree more. When I came to the University of Missouri five years ago, there was no required employee contribution to the defined benefit plan. And what that meant was that a lot of people didn't understand the value of the plan. In the spirit of not letting a good crisis go to waste, during the huge downturn in the market when our university was faced with having to put a tremendous amount of money into the retirement plan, we made the decision to institute an employee contribution requirement. While employees were not happy about this change, they started learning a lot more about this benefit.
That said, we still face a huge uphill battle in getting people to appreciate the value of their core retirement plan, and even more importantly, the need for additional savings. As we in this business all know, there remains a gap for many who are relying on that core retirement plan and who don't have nearly enough resources set aside for things like medical care in retirement. Unfortunately, because many don't understand how much they need to save, they create this self-fulfilling prophecy of never feeling like they can afford to retire.
So how do college and university employers break through with messages about saving that resonate with employees?
BRANTLEY: Because of the way that many employees view retirement—as this amorphous thing that's so complex they can never understand it—they too often completely disengage. Of utmost importance, institutions need to provide information that their employees can digest. Instead of passing out a 12-page document that employees must sift through to try and determine its relevance for them, attempts must be made on a regular and ongoing basis to pull people into the conversation and to make the concepts of retire-ment planning and retirement readiness accessible.
RODRIGUEZ: We have found the most powerful form of communication is making one-on-one retirement advisers available to our employees. While online and broad-based communication is necessary, it really takes face-to-face communication to get employees to take the step of actually contributing, or increasing their existing contribution. When we reworked our plan, we made sure we could provide this service to our employees, and it has been well received.
HUTH: To me, the bottom line is doing a better job of educating our employees about their retirement needs and what must be done to provide for those needs. Current concerns about the continuation of Social Security as we know it can help make employees more resolute about what they need to do to prepare. Having employees actually take the steps they need to prepare will require greater effort both from our institutions and our service providers in the years ahead.
KARLA HIGNITE, Middletown, Rhode Island, is a contributing editor for Business Officer.