Done Deal | Published in March 2016

Consolidating Vendors

A K-12 403(b) plan sponsor improves efficiencies.

By Rebecca Moore | March 2016
Art by Chris Buzelli

School District 27 Northbrook[, Illinois]
Kimberly Arakelian, assistant superintendent for finance and operations at School District 27 Northbrook
457(b)/403(b) plan; defined benefit plan
58% in 457(b)/403(b)

 When the Internal Revenue Service (IRS) issued final regulations for 403(b) plans in 2007, school systems had to examine how their affected plans were administered. This led School District 27 Northbrook (NB27), in Northbrook, Illinois, to scrutinize its own 403(b) plan, says Kimberly Arakelian, assistant superintendent for finance and operations for the district.

PROBLEM: Prior to January 1, 2009, the effective date for most of the 403(b) regulations, K–12 school systems could remain uninvolved with their plans and were not required to monitor participant activity. At that time, NB27’s 403(b) plan offered 21 vendors, with which most participants had signed individual annuity contracts.

As the district reviewed plan administration, it noticed that the fees on the annuities were high—nearly all of those products were subject to wrap fees, and participants faced surrender charges if they wanted to transfer their money to another vendor. The district also realized that, because participants owned these investments, it was not protected from fiduciary liability for participant investment choices.

SOLUTION: Arakelian says, “We asked, ‘What can we put in place that benefits participants, allows them great fund choice and reduced fees, and protects and helps the district in terms of exposure [to] fiduciary liability?’”

A school board member had heard about the Illinois Public Pension Fund Association (IPPFA). Founded in 1985, IPPFA is a not-for-profit organization whose primary function is to educate and train all Illinois Public Pension Fund trustees. By leveraging the buying power of hundreds of public-sector employers, IPPFA built a defined contribution (DC) co-operative that public-sector employers could join at no cost—the Wise Choice for Educators Combined 457(b)/403(b) Plan.

Joel Babbitt, benefits coordinator with IPPFA in Chicago, says there are 21 core funds for the 403(b) portion of the plan and 22 for the 457(b) portion.

Additionally, participants may choose from over 5,000 mutual and exchange-traded funds (ETFs) through a Schwab Personal Choice self-directed brokerage account.

Before adopting the Wise Choice plan, the district had to get employees and the employee union on board. Arakelian says the district administration has a collaborative relationship with the union; trust exists because both groups support transparency of information.

Once the decision was made to go with IPPFA, Babbitt and Debby Karton, also a benefits coordinator in the Chicago office, visited every school in the district and educated employees about the benefits of Wise Choice. The new plan was implemented in January 2010.

As participants had been used to one-on-one discussions with their annuity providers, Babbitt and Karton adopted a similar approach, meeting with each person to explain the new investments and how these cost less than the former annuities. As a result, almost all participants consolidated their accounts. “About half did so in the first year and most of the rest over the next 18 months,” Babbitt says. As an ongoing offering, the coordinators provide quarterly meetings at each school and individual consultations on request.

Besides more fund choices for participants and less fiduciary liability for NB27, the move to a single-provider plan fueled participation. Now, 118 out of 205 eligibles are in the combined 457(b)/403(b)—a good participation rate, considering that all employees are eligible for benefits from a defined benefit (DB) plan. The 457(b)/403(b) portions together have $6.7 million in assets.

Arakelian is most excited about the reduction in participants’ fees—between 40% and 50% over the last five years. “In dollars, it’s been roughly $170,000!” she exclaims.