Single Provider, Multiple Choices
Compliance with new 403(b) regulations is reason to review other elements of your retirement plans. At Pepperdine University, that process led to vendor consolidation without losing control or investment choice.
By Paul B. Lasiter
The tremendous success and popularity of the 401(k) plan has now rocked the quiet 403(b) plan world. New Internal Revenue Service (IRS) regulations that generally were effective on Jan. 1, 2009 (some provisions have earlier or later effective dates) require 403(b) plans to look and act like 401(k)s in many key respects. Additionally, 403(b) plan sponsors are now required to perform the same duties as their 401(k) counterparts.
We all need to be up to speed on a multitude of requirements for administering our 403(b) plans, including providing increased transparency of plan fees and costs, creating a clear audit trail that documents how and why we make decisions related to our plans, and complying with more stringent fiduciary responsibilities.
Even if you have addressed these issues recently, it may make sense to review your long-term strategy for achieving your plan's objectives and serving the best interests of plan participants. As retirement plan fiduciaries, one of our key duties under the Employee Retirement Income Security Act (ERISA) is to survey the market on a regular basis—usually every three to five years, typically through a formal proposal request process—to ensure we are offering a competitive plan.
In the event your organization has not completed this process in the past few years, seriously consider doing so to fulfill your fiduciary obligations and provide a defense in the event of a Department of Labor (DOL) audit.
If your plan is currently being served by multiple vendors, this may also be a good time to evaluate whether consolidating your plan's assets and administration with a single provider would offer additional administrative efficiencies, expanded investment choices, reduced costs, and increased plan flexibility. At Pepperdine, we decided that doing so was in the best interests of both our plan participants and the university.
Future of the 403(b) Is Now
A key consideration should be the long-term vision for your institution's retirement plan and the value you want to deliver to your participants. Are your objectives currently being served by the multiple plan providers with which you're doing business? This is one question that may be best answered by taking a lesson from our 401(k) sponsor counterparts. For years, 401(k) plans have been gravitating toward single plan providers and “open architecture”—the ability to select funds from virtually the entire mutual fund marketplace through the convenience of a one-stop shop.
At the same time, large numbers of plan sponsors in higher education have chosen to offer multiple vendors because it was the only way to extend the range of investment options in their plans. But, as the market has evolved and open architecture investment platforms have become the norm, former reasoning requiring multiple plan providers to achieve a broad and diversified range of investment options to plan participants may no longer apply.
Today, given the new 403(b) requirements and the greater level of fiduciary responsibility this entails, the new model for the 403(b) retirement plan market is likely to be a single plan provider and administrator. The most versatile providers will likely offer an open architecture that enables a broad array of nonproprietary investment options—that is, essentially a multivendor opportunity from a single source. The single provider arrangement can also enable a greater level of convenience, consistency, and potential cost savings as well as expert assistance needed to comply with new regulations.
What are the issues facing plan sponsors who are considering consolidation of their plans with a single vendor? Are there any best practices that serve as guidelines to facilitate the process? To answer these questions, I'll discuss the approach used by Pepperdine to respond to the challenges of the new regulations. By consolidating our plan with a single plan provider, we were able to enhance the overall retirement offering to our faculty and staff by increasing investment choices, implementing a sound fiduciary process based on industry best practices, and controlling overall plan expenses.
Opting for a Single Provider Solution
At Pepperdine, our 403(b) plan had historically featured four different vendors. New requirements had significant implications for maintaining those multiple relationships. When we considered our new responsibilities, we saw that plan sponsors that continued using multiple vendors, as we had, would need to (1) collect and assemble plan data from each of their providers; (2) aggregate the data in order to complete an independent audit of their plan, newly required for most large 403(b) plans starting with the 2009 plan year Form 5500 report; and (3) prepare the required regulatory filings.
We believed that additional staffing resources would be required to comply with this and other aspects of the new regulations, and it would be both cumbersome and costly to continue overseeing multiple vendors. As such, we did not believe that maintaining a multiple-vendor platform was a cost-effective, viable option.
We also had concerns about transparency of plan fees and investment expenses—which were being obscured by offering investments from multiple vendors—along with potential redundancy in both asset class and investment type. On the other hand, we were unwilling to sacrifice broad range of investment choice, which we believed was the best way to provide plan participants with the tools necessary to navigate the increasingly volatile and complex financial markets.
With some providers, exclusivity for the administrative function meant being obligated to offer some or all of that provider's proprietary funds on the plan's investment menu—whether or not those investments offered participants the best range of choice, value, and relative performance. If we were to seek a single provider, we were determined to maintain our ability to offer the widest possible spectrum of investment choice, with funds that the university—working with an independent financial adviser—could identify as being the “best options in their respective asset classes.”
After analyzing all these factors, we decided the best course of action was to move to a single plan provider. Once the decision to consolidate vendors was made, we discovered that there would be other opportunities to enhance our plan, create a robust due diligence process, and potentially reduce costs.
See sidebar, "Fee Structures That Make a Difference"
Taking a Page From Pepperdine
We began the shift to a single provider in the second half of 2008. During that process, we learned a lot about how it's done.
Get professional help if you need it. At Pepperdine, we wanted to ensure that we approached the challenges of consolidating our retirement plan in the most efficient and effective way possible, and recognized that we did not have the in-house expertise to identify best practices related to such a transition. One of our key objectives was to create a plan with maximum investment flexibility. We knew that would require extensive research to select appropriate investments, as well as ongoing monitoring of investment performance. Using a formal proposal request process, we selected Benefit Funding Services Group, an independent investment adviser, to help us screen and evaluate our investment alternatives for inclusion in our plan.
Our independent adviser also assisted us with several other important initiatives:
- Identifying our plan objectives and requirements.
- Determining what the investment menu should be and establishing a fiduciary process for evaluating funds according to the criteria described in our investment policy statement (IPS).
- Reviewing and evaluating prospective providers.
- Selecting the right provider to meet our objectives and requirements.
Examine the structure of your plan and consider ways to simplify it. Originally, Pepperdine offered an ERISA 403(b) plan with employer-only contributions as well as a supplemental plan for employee contributions. As previously stated, four vendors offered various investment options for the two plans.
Historically, ERISA 403 (b) plans were subject to limited annual reporting requirements, but now, you must file the full Form 5500 and applicable schedules just as organizations with 401 (k) plans do.
The duplication of effort did not make very much sense to us, so we decided to simplify our retirement program by combining the two plans under a single plan provider. We elected to create a single 403(b) plan that would accept both employer and employee contributions. There were also administrative services being handled internally that we identified for potential outsourcing to a new provider, freeing staff from these responsibilities and gaining professional expertise to streamline processes and reduce costs.
Make sure you have an investment policy statement in place and revise it if necessary. We wanted our plan to be founded on a completely open architecture, allowing for virtually any type of funds or fund families that were qualified and deemed appropriate for inclusion in the investment platform. The IPS we created with the help of our adviser ensured that we had a disciplined process in place to select appropriate retirement investment options and avoid narrowly defined funds that would only appeal to a few select participants. This allowed for the maximum flexibility in expanding the range of investment options. We worked with our adviser to create a due diligence process that included qualitative and quantitative criteria for evaluating, selecting, and monitoring investment performance, and identifying investments that did not meet the plan's objectives.
Under the new DOL plan reporting and audit rules, having an IPS is a must, and serves many useful purposes for plan sponsors.
Evaluate your investment menu lineup. A multivendor plan can be burdened with redundancies in the asset classes and investment options being made available. Our goal was to offer “something for everyone,” from the financial novice to the more-sophisticated investor. In the end, we expanded our core platform of investment options to include index funds, managed funds, target date funds, and a brokerage window that allows our plan participants to invest in any 403(b) qualified investment at their own direction. Choosing a single provider with a completely open architecture allowed us extensive control over the investments we would offer.
However, one potential downside to our approach is that the more investment options we made available in our plan, the more due diligence we had to be willing to exert—another reason we chose to consolidate with a single provider and a single investment lineup. The open architecture approach via a single provider made it easier for us to remove lower-performing funds and substitute better alternatives.
Once you've decided on the investments that will be included in your plan, it's important to have a formalized approach documenting what industry benchmarks and other evaluative criteria you'll use to assess performance, and to decide how often that performance review will take place. For practical purposes, this was not significantly different from the review process we have in place for investments in our endowment. Having our outside adviser compile the performance review provided the university with significant added value. It also addressed concerns about conflicts of interest that might arise from having the plan provider be involved in any way in fund selection or performance review.
Decide how to handle existing plan assets. An additional concern when considering a plan consolidation is how to handle the existing assets held by the current plan vendors. We wanted to be able to preserve some of the current fund offerings on the new platform. So it was important that a new provider be able to accommodate this objective.
In some instances, we also wanted participants to have the choice to maintain existing assets where they were, or transfer them to the new provider. This necessitated examination of the way in which such transfers would affect our participant base, and whether or not existing vendors would impose any kind of surrender charges. In the end, we chose to cover any costs incurred by our participants to encourage transfers. (Surrender fees did not turn out to be an issue, although some existing assets in the plan did have to remain with one provider's noncashable annuity account for up to 10 years.)
Consider ways to increase plan participation. We also evaluated the possibility of implementing an automatic enrollment feature for new participants, which would mean identifying an appropriate default investment option for the plan. Ultimately, we decided that automatic enrollment was not necessary, since our employee participation levels were already high. However, plan sponsors may want to consider adding this feature, and it's easier to do through a single provider with one default option for all participants, rather than through multiple competing vendors, each with its own default options.
Be mindful of the need for reporting and auditing. An added benefit of moving to a single vendor is that, going forward, it will simplify our ability to comply with new DOL reporting and auditing requirements. Historically, ERISA 403(b) plans were subject to limited annual reporting requirements, but now, you must file the full Form 5500 and applicable schedules just as organizations with 401(k) plans do. In addition, plans with 100 or more participants at the beginning of the plan year must now include audited financial statements with their Form 5500s as well as comply with new reporting requirements for plan fees and expenses. A limited exception is available to certain 403(b) plans for the 2009 plan year, even if such a plan had up to 120 participants as of the beginning of the plan year.
If your plan offers multiple vendors, it means communicating and coordinating with all of them to track the financial information required for the filing. The cost of your audit is also likely to be greater when there is no centralized source for financial information, since auditors have to review multiple sources. Having a single provider offering information and assistance with these requirements will greatly facilitate this process for Pepperdine and likely reduce auditing costs in future years.
Know your participant base so you can best prepare them for the change. The multivendor approach can create a rather fragmented environment in terms of educating participants about retirement planning. Participants deal exclusively with the vendor(s) they've selected, and strong loyalties can exist. However, when it comes to financial education for all participants, plan sponsors may find themselves having to coordinate the efforts of all the vendors and setting the parameters for how and when that education will be delivered, without being able to exert any real control over the consistency of the message itself.
In today's more volatile financial climate, participants need greater education and guidance in terms of making smart decisions about their investment strategy. A single plan provider with completely open architecture has no vested interest in any of the investment offerings, so the provider can help make the education process more comprehensive and effective, offering a consistent approach and message and making it easier for participants to get information in one place. Rather than having to choose from among different vendors and evaluating their funds and services, plan participants can get their education and support from one objective source.
Recognizing that we would have to address participants' concerns early in the process and continue to provide support, we wanted to ensure that the new vendor selected would be an ongoing, expert partner in terms of communicating plan changes, educating participants about their new choices, and providing decision-making guidance both through group meetings as well as one-on-one consultations. Education was critical, since participants had a number of different choices to make.
We let plan participants know early on the ways in which the plan was changing, the value and benefits the new plan provider would bring, and the schedule for training that would assure participants that there were multiple opportunities for them to gather information and ask questions. Our new plan provider also assisted in this effort by making its representatives readily available both on site and over the phone.
Our university and our retirement plan participants ultimately reaped many benefits from the decision to move to a single provider. For the most part, faculty and staff were highly pleased with the comprehensive investment menu, as well as the new efficiencies resulting from having a single provider—such as a consolidated statement, single point of contact, dedicated representatives, and easy-to-use Web site.
Plan sponsors choosing to go the single provider route may well find the kinds of benefits that we did:
- Simplification of compliance under new IRS and DOL requirements.
- A better fiduciary process with ongoing evaluation of the investments offered in the plan.
- Economies of scale achieved through a single vendor.
- Greater transparency of fees and lowered costs for plan participants.
- Greater accountability from a single provider.
In complying with the DOL and new 403(b) regulations, we also found opportunities not to just change our plans and processes, but also to make them better. Under ERISA, fiduciaries must discharge their duties solely in the interest of participants and their beneficiaries. Therefore, changes have to be for the exclusive benefit of plan participants. For us, consolidating with a single vendor has been the straightforward solution to achieving that objective.
PAUL B. LASITER is chief financial officer, Pepperdine University, Malibu, California.