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On Track & On Time

When the retirement train arrives, are your employees prepared to board? Plan providers are taking new approaches to retirement readiness that help faculty and staff meet their anticipated schedules, while refreshing the institution and reducing compliance risks.

By Nancy D. Suttenfield, Brian M. Usischon, and Rocky A. Yearwood

*Assisting employees with their retirement plan decisions can allow timely retirement, foster faculty and staff renewal, and strengthen fiduciary compliance. Yet, employee visions of leisurely retiring to a sunny locale, perhaps lounging by the pool or hitting the greens, are being replaced by fear of the unknown. In Fidelity Investment's 2011 Higher Education Generational Survey of retirement plan participants, two out of three expressed concern about living comfortably in retirement. About half of the respondents in the same survey indicated they would delay retirement—or never retire at all.

Fidelity's findings reflect similar concerns of the general population, indicating that only 17 percent of today's workers believe they are on track to replace the recommended 80 percent of their current income or their own retirement income goal.

These survey results have many near- and long-term implications for institutions, not the least of which are the disappointment of delayed retirement and the resulting slow turnover that precludes faculty and staff from advancement and renewal. In the worst case, an employee may try to hold the institution legally responsible for the poor investment performance of his or her portfolio.

Read An Online Extra

To read more about the way William Peace University created its "go-to" committee to support retirement readiness, see "Reworking Retirement Plan Resources" in Business Officer Plus at www.nacubo.org.

Along with these uncertainties, sweeping changes to 403(b) regulations made by the Internal Revenue Service, effective Dec. 31, 2008, have already caused many colleges and universities to take a more proactive approach to retirement plan management, particularly at institutions not covered by ERISA (Employee Retirement Income Security Act) requirements. Guidance issued by the Department of Labor has generally given institutions greater flexibility to be more of a conduit for investment guidance as long as that information is provided by an independent third party—rather than perceived as advice coming directly from the employer. (Read "Draw Them In" in the April 2013 issue of Business Officer to read about increasing employee participation in employer-provided retirement programs.)

Chief business officers need to be knowledgeable about (1) the institution's responsibility to provide retirement plan participants with access to investment guidance, (2) fiduciary obligations related to retirement plan governance, and (3) areas of compliance required to minimize risk. For example, under ERISA, fiduciaries are expected to act with a duty of loyalty to retirement plan participants and their beneficiaries when making decisions that affect them. Failure to do so could result in litigation and the potential for monetary sanctions.

Following is a discussion of these priority issues for CBOs, along with case studies from a large public university (University of North Carolina System) and a small private college (William Peace University), describing the institutions' efforts to effectively manage their retirement plans.

Facilitating Retirement Readiness

Although retirement readiness means something different to everyone, the concept generally means that an individual has accumulated savings and investments by the usual anticipated retirement age that are ample for all expected expenses until end of life. Because participants in defined contribution retirement plans are responsible for investment decisions, their degree of readiness depends greatly on the individual's financial literacy and the way it drives prudent financial decisions. Obviously, lackluster investment performance and unsuitably high portfolio risks, as the result of employees making ill-informed decisions, can derail a timely retirement or leave an employee with insufficient resources to meet lifetime needs.

Flashback ... 26 Years Ago

In a September 1987 Business Officer article about choice in pension investments . . .

"Men and women who exercise the right to vote, to work and pay taxes, to shape the minds of our nation's young people, and to invigorate our culture and economy through the pursuit of knowledge are certainly capable of exercising the opportunity to shape their own retirement goals and plan and invest in a manner they believe most likely to serve their individual ends. ... It would be a mistake to assume that just because some clamor for change, everyone wants the same thing. What distinguishes today's pension-planning environment is not change per se, but rather the diversified, plural, and in many cases conflicting character of change."

CLIFTON R. WHARTON JR., chairman and chief executive officer, TIAA-CREF, in a speech given at the College and University Personnel Association's annual meeting

Myriad factors make adequate retirement resources a moving target. Employees worry about increases in health-care costs, general inflation, taxes, life expectancy, market volatility, and likely decreases in Social Security and Medicare. These variables, along with dislike or avoidance of financial complexity, are contributing to procrastination and the failure of many plan participants to make and execute a financial plan for retirement. In fact, the Employee Benefit Research Institute reports that about three out of five workers and their spouses have not even estimated their retirement income needs. Is it any wonder that many employees are asking for more help from a source they trust—their employer?

In fact, employee demand for proactive investment advice to help prepare for retirement is now widely recognized and documented. Evidence from a 2012 Koski Research study of 401(k) participants indicates that working with an adviser increases the likelihood that employees remain true to their investment objectives and avoid panicky, ill-timed portfolio changes during periods of market volatility. The Koski study also discovered that 83 percent of employees surveyed were interested in receiving professional investment management services through their employer. Reasons they cited were lack of time, experience, or knowledge to handle this responsibility on their own.

Historically, many employers havetaken a hands-off approach in monitor-ing their employees' retirement preparations. Two factors have contributed to this mind-set:

  • In plan environments where employees are directing their own investments, the general perception is that the employees themselves bear the burden of evaluating plan options and accepting the consequences of their decisions.
  • Employers have wanted to avoid the potential risks and liability associated with the appearance of providing investment advice to employees.

Employers have instead operated within the boundaries defined by U.S. Department of Labor (DOL) Interpretive Bulletin 96-1 and limited their participant help to basic, one-size-fits-all general financial or investment education.

Assuming a retirement plan satisfies the safe harbor requirements under Section 404(c) of ERISA, such general information avoids being characterized as investment advice, and thereby insulates the employer from liability for employee investment decisions. However, employees often misunderstand general education, which can prevent them from taking the necessary prudent steps to manage their retirement savings investments.

In 2012, ERISA 404a-5 regulations expanded the investment-related information that employers must make available to employees. Fortunately, other such solutions are emerging to make it easier for employers to provide help for their employees participating in retirement plans.

The Pension Protection Act expands advice for employees. Recognizing that traditional informational approaches to employee education might not be leading to the desired retirement outcome, the Pension Protection Act of 2006 (PPA 2006) sought to expand employee access to investment advice to facilitate better-informed employee investment decisions. The act, along with subsequent guidance from the DOL, defines "eligible investment advice arrangements" and provides protection to employers from being held responsible for the advice as long as all required conditions are met.

Broadly speaking, eligible advice arrangements fall into two categories commonly referred to as "level fee" or "computer model," in which level fees are not required. The level-fee arrangement allows an independent fiduciary adviser to provide investment advice to employees as long as the adviser's compensation remains the same regardless of the advice given. Among other requirements, advice generated from a computer-model arrangement must meet multiple criteria, including application of generally accepted investment theories, incorporation of relevant information specific to the individual, and utilization of prescribed objective criteria for asset allocation considering all fund options available in the retirement plan.

Regardless of the arrangement chosen, when plan fiduciaries choose an investment advice provider at the plan level for all employees, they retain responsibility to prudently select and monitor the provider.

In addition to this eligibility definition, the DOL also requires advisers to request and take into consideration information about the participant's age, time horizon, risk tolerance, and other assets. This requirement brings into investment decisions other relevant factors that employees sometimes overlook.

Third-party investment service providersare an option. Another approach to employee investment advice is also gaining prominence: A number of institutions are allowing an option for employees to directly engage independent third-party investment service providers. This allows an employee to engage the services of a registered investment adviser of personal choice. The employee provides the adviser access to his or her retirement account for the purpose of actively managing the portfolio through changing economic conditions and according to specific retirement income goals and identified risk tolerance. Although these services are provided within the context of the employer retirement plan, under this employee choice model the individual may pay entirely for these highly personalized services—or the institution may pay some or all of the cost.

Evolving Fiduciary Practices, Related Risks

As retirement plan sponsors, colleges and universities have begun to update their procedural approaches for meeting fiduciary obligations—such as creating a governance structure and decision process, adopting an investment policy statement, and deciding whether to engage external expertise. Employers are also turning to evolving best practices around prudent risk management and mitigation. ERISA's prudence standard is not that of a prudent layperson but rather that of a prudent fiduciary with professional expertise. Various court rulings over the years concerning ERISA's fiduciary requirements have held that employers without sufficient fiduciary or investment expertise have a duty to engage a competent outside expert to provide the fiduciary support services needed to demonstrate and comply with a sound procedural approach to managing the retirement plan.

Higher education is clearly facing a broad set of retirement-related challenges and regulatory uncertainties.

Uncertainty surrounding the scope of judicial interpretations of fiduciary obligations has increased the potential for future employer liability. Fiduciary obligations are often assumed-mistakenly-to rest entirely with a third-party retirement product provider chosen to administer the details of the employer's retirement plan. In fact, retirement product providers frequently take no responsibility for tax or legal compliance of ERISA-qualified retirement plans.

Instead, named fiduciaries (individuals designated as having discretion or control over plan administration and assets) in the retirement plan document are personally liable for plan management. Every retirement plan has at least one named plan fiduciary (potentially the president, chief business officer, and/or the head of human resources). The employer community is increasingly aware that reliance on nonfiduciary service providers leaves organizations exposed to claims of insufficient oversight on behalf of employee welfare. (See sidebar,"Accountability for Investment Results: What Institutions Should Know,"for perspectives on fiduciary obligations).

Like all employers, higher education is clearly facing a broad set of retirement-related challenges and regulatory uncertainties in the coming years. The University of North Carolina System and William Peace University, two very different institutions of higher education, are paving the way for the timely retirement of faculty and staff using two different approaches to communication, education, and advice. Each is also taking steps to strengthen risk management within the standard of care expected of retirement plan fiduciaries in recognition of the changing expectations for employers. Read their stories in the following case studies.

Two Solutions, Both Right

To help employees prepare for retirement requires thoughtful, strategic management and innovative solutions that give faculty and staff access to varied sources of help.

UNC opted for a sustained leadership focus through an education policy statement, which calls for help and advice offerings that are differentiated for subgroups. WPU chose to partner with a retirement plan adviser/cofiduciary and give its employees access to personalized help that is consistent with its small-campus culture.

By cost-effectively weaving together communication, education, and advice from external experts, both institutions have addressed recent and anticipated trends in fiduciary obligations and implemented strategic interventions for timely employee retirements.

Accountability for Investment Results: What Institutions Should Know

Although retirement plan participants must receive certain required information, the delivery of such information does not directly translate into investment knowledge sufficient to result in sound investment decisions and a successful retirement outcome. Some legal experts have reasoned that, since employer selection of fund options is a fiduciary act that ought to consider the investment sophistication of employees, some consideration should also be given to providing investment education or investment advice as a risk mitigation measure.

In a 2011 article in the industry publication, Defined Contribution Insights, one retirement expert asserted: "Employers that provide retirement plans covered by ERISA are fiduciaries that can be held liable for negative investment results of their own workers' decisions," adding that providing employees access to investment education and advice from qualified independent third-party advisers could reduce their potential liabilities.

Ultimately, any determination of liability is a matter for the courts. Nevertheless, the impact of failing to address retirement readiness more broadly is a reality for both institutions and employees. Obviously, it benefits all parties when participants' investments do well and individuals can retire as planned.

Changing Investment Behavior

ERISA fee litigation cases have clearly emphasized the need for employers to implement and maintain a deliberative process that is for the exclusive benefit of plan participants and their beneficiaries. If challenged with legal claims alleging a breach of fiduciary duty, an employer must be able to demonstrate a prudent process behind its decision making, as a defense. Investment performance is influenced by both plan-level oversight obligations and employee decisions. Development of an investment policy and adherence to its fund replacement criteria assist an employer in demonstrating effective oversight and meeting obligations under a fiduciary standard of care.

The three primary drivers that directly affect retirement readiness outcomes are contribution rates, plan expenses, and investment performance. Increasingly employers and their plan designers are turning to "behavioral finance"-initiatives that assist employees in making effective decisions regarding their plans-to enhance outcomes. Examples of behavior-changing efforts include establishing automatic enrollment provisions and automatic annual escalation of employee contribution rates. Monitoring plan expenses, negotiating reasonable fees with all service providers, and selecting investment options also are clear fiduciary responsibilities that rest with the employer.

Risks and Resources

In assembling resources to help participants make investment decisions, employers have a spectrum of options to consider. An employer that chooses to do little more than provide general information in order to be safe, as was historical practice, could potentially face greater risk from the claims of disgruntled future retirees.

That said, beyond the legal and regulatory considerations, many institutions of higher education are benevolently inclined to enhance faculty and staff welfare using the range of strategies chosen by the University of North Carolina and William Peace University, as profiled here. An altruistic and proactive mind-set challenges the notion that an employer can remain relatively detached from providing retirement readiness help to employees.

In addition, many employers historically avoided offering advice programs from fear of liability associated with the advice provider, since employer selection of an advice provider is inherently a fiduciary decision. Ironically, the Department of Labor (DOL) has, in fact, long been a supporter of participant advice; and legal case history focuses on evidence of a prudent selection and monitoring process, and not investment results, to determine whether there is liability for investment losses. Recent DOL actions and regulatory clarifications have also provided ways that employers can approach participant-level advice with minimal risk.

NANCY D. SUTTENFIELD, former chief financial officer, University of North Carolina Chapel Hill, is director, higher education services, Verity Asset Management; BRIAN M. USISCHON, is associate vice president for human resources and the university benefits officer, University of North Carolina General Administration, Chapel Hill; and ROCKY A. YEARWOOD, is vice president for administration and chief financial officer, William Peace University, Raleigh, North Carolina.