A Plan Sponsor Decides Simplification Is Best for Everyone

January 3, 2014 (PLANSPONSOR.com) – Many 403(b) sponsors were faced with necessary changes following passage of new Internal Revenue Service regulations in 2007, and Niagara University was no different.

The university recognized it needed a retirement plan committee responsible for monitoring investments, so University President Reverend James J. Maher appointed people to committee, including faculty, staff and administration. There are seven people on the 403(b) investment oversight committee; Edward W. Hutton, CFA, assistant professor of finance and director of the University’s Financial Markets Laboratory, was elected chair in 2012.

Niagara University, founded in 1856, is located along the top of picturesque Monteagle Ridge overlooking the Niagara River Gorge, just four miles north of Niagara Falls. Hutton was a financial industry investment professional for 20 years, and became a full-time faculty member at the university six years ago.

The 403(b) plan is the university’s only retirement program for faculty, staff and administration. There is a faculty union, so the design of the plan and any plan changes must be approved by the union.

Over the past 10 years, the university has used three different plan vendors and a number of investment providers. In all, participants had more than 150 choices for investments, Hutton tells PLANSPONSOR. There was no reasoning for why the choices were offered, he says, “It was partly because we wanted a broad offering.”

But, the university found it was too much for participants. According to Hutton, there was no clear-cut, logic for selecting investments, and many participants did not know what funds they were in, why they were in them or how the funds were doing. Some were invested in 15 or 20 different funds trying to have diversification, but not knowing what they were doing.

“As a committee, there was no way to provide advice, or even performance results, because of all the choice,” he says. “When we looked at our fiduciary duties with the new laws, we knew we couldn’t provide the oversight we needed.” The plan is an Employee Retirement Income Security Act (ERISA)-governed plan.

There is one plan design for the unionized faculty; the rest of the staff has another plan design. The university has around 450 employees—160 faculty, around 320 non-faculty—and there are 400 active participants in the 403(b) plan. Adding in the terminations and retirees, there are around 700 403(b) accounts.

Human resources staff at the university are responsible for monitoring plan limits, loans and hardship withdrawals. Hutton points out this was very difficult with three different vendors, as staff had to get data from three different sources and participants could have balances with all three. “We’re a small school, there are only one or two people trying to do this.”

In addition, there was no standardization for how data was provided. It was provided at different times and via different forms; a spreadsheet had to be created by hand.

With all of this in mind, Hutton and the 403(b) investment oversight committee knew they had to simplify, but they didn’t know where to focus. They hired Fiduciary Investment Advisors to do a plan diagnostic. As part of this, Fiduciary Investment Advisors analyzed the university’s investments and mapped them into different asset classes. The committee found they had an uneven number of choices by class and a lot of redundancy. “We spent almost the first year of the committee’s existence working with Fiduciary Investment Advisors deciding what we needed in the plan to fulfill participants’ needs and meet our fiduciary responsibility,” Hutton says. “They showed us how we could do that with 30 investment choices.”

Next, Niagara University issued a request for proposals (RFP), but not open to everyone in the market, only to its current vendors. Hutton says they started the RFP process around December 2012, and the process took about a couple of months. TIAA-CREF was selected.

But, before they could consolidate, they had to get the faculty union on board. “Going from an unlimited number of investment options to a smaller set may look like giving something up,” Hutton notes. He and the committee talked with the union and faculty to convince them this was a benefit.

One thing that sold the union was the availability through TIAA-CREF’s open architecture platform to use low-cost index funds from Vanguard. It took several months, but the faculty approved the consolidation, and during the second quarter of 2013, the committee worked on the transition to TIAA-CREF and the communication of the changes to employees.

The plan now has 30 investment options, including 20 unique funds among different asset classes and 10 target-date funds. “We have better diversification and better choice,” Hutton says.

Along with the new investment menu, Niagara University established a process to help participants choose investments. “We want participants to identify with one of four different paths to retirement,” Hutton explains. “If a participant wants no involvement with investing and just wants to set it and forget it, they can choose target-date funds. If they want to choose their own asset allocation but do not want active management, we offer low-cost Vanguard indexed funds. If they have an investing style and views of market activity and want actively managed funds, we offer those. And, we offer an annuity path for those near or in retirement who want a traditional guaranteed return contract.”

Hutton points out,” We used to be unable to explain why participants would choose any of the 150 funds offered, now we say, ‘Describe yourself’ and ‘What kind of investor are you,’ and we have a path that fits the answers. It makes sense to folks.”

The university still has an active relationship with Fiduciary Investment Advisors, which monitors the performance of funds against peers each quarter and lets the committee know how the plan’s funds rank. If a fund is lagging behind, it will be flagged and the committee will monitor it to decide if they need to get rid of it. The committee has begun presenting this information to participants, who have responded well, Hutton says.

Hutton and the committee provide participant education, such as seminars about retirement strategies and the importance of fees in retirement accounts. They have started quarterly participant meetings to share the Fiduciary Investment Advisors information, and the information and recordings of the meetings are posted on a microsite of the university’s website.

Human resources still monitors contribution limits and loan and hardship withdrawal requests, but it is a much different process now because there’s a single source of information, Hutton notes.

“I think everyone would tell you that fewer choices, but better choices, was a good choice,” he concludes. “Having fewer providers and a simpler investment menu makes recordkeeping and administration easier, and that’s important, but it also helps people better understand their retirement plan, which encourages them to participate and be more ready for retirement.”