Total plan assets/participants: $60 million/210
Participation rate: 100%
Average deferral rate: 10.19% (includes 5% mandatory
employee contribution)
Default investment: TIAA-CREF TDFs
Employer contribution to plan: 6%
Match: 2% (when employee contributes above
mandatory contribution)

When the Internal Revenue Service (IRS) issued regulations revamping 403(b) plans, one result was that more plans underwent plan audits. The Gilman School in Baltimore, recipient of one such audit, found this process eye-opening in regard to its plan design.

“When the auditors came, we had two plans with TIAA-CREF and one with another vendor,” says Angela Johnson, vice president of human resources (HR) at the private, independent K-through-12 college preparatory day school for boys. “We had close to 200 investment choices for employees.”

According to Jania Stout, practice leader and vice president of PSA Fiduciary Consulting Group, and now Gilman School adviser, the school then had three plans with three different plan documents. One of the two TIAA-CREF plans was deferral-only, and the other included a 5% mandatory employee contribution and 6% employer contribution. The third, from T. Rowe Price, had a dollar-for-dollar match for employee deferrals up to 2% of salary. In the two TIAA-CREF plans, participant assets were put into individual annuity contracts that were invested in TIAA-CREF funds, including target-date funds (TDFs). In the T. Rowe Price plan, participants could invest their assets in any of that company’s funds, including its target-date funds.

After going through the process of the audit, Gilman School realized this was not the optimal plan design for performing the proper due diligence on investments and ensuring employees were investing in sufficiently diversified, appropriate funds.

Gilman School hired PSA Fiduciary Consulting, also in Baltimore, in 2012, after interviewing multiple advisers in its search for a co-fiduciary to help with that investment due diligence. PSA benchmarked the plans’ fees and services and conducted a fiduciary audit of administrative processes. Following that, it recommended that the school consolidate the plans to one vendor.

The school did so, merging all three plans into one, with one plan document. “We wanted to simplify and to offer the best investments, so we moved to a new TIAA-CREF platform,” Johnson says. Aside from its competitive fees and impressive website, TIAA-CREF was the vendor most Gilman employees felt loyal to and comfortable with; the school wanted to honor that.

With Stout’s help, Gilman School started setting goals for its plan and participants. According to Johnson, the first was to get participants to a savings level of 15% of salary. The second was to help participants realize they need to be invested in a diversified portfolio; the third was to help employees establish a budget and get out of debt.

The new plan has a mandatory employee contribution of 5% of salary; the school, in turn, contributes 6%. If a participant defers another 2%, an additional 2% of salary, the school will match that 2%. “We could have done nothing more than offered our 6% matching contribution, and, coupled with the 5% mandatory contribution, participants would be saving more than 10% of salary,” Johnson says. “But we want to ensure our employees are on track for financial wellness.” The average deferral rate among participants is now 10.19%, including the 5% mandatory contribution.

Transitioning to a New Platform

With its new goals and a single recordkeeper, the school was able to move to a plan design that had lower costs and a simplified investment menu, which was easier for employees to understand.

But, for 403(b) plan sponsors, the process of moving participant assets from individual annuity contracts to mutual fund platforms is far from seamless. Since the plan sponsor does not control the assets, the move must be initiated by participants, many of whom have a long history with a contract vendor.
Gilman’s plan sponsors embarked on a year-long educational campaign. “We started out with a mandatory group meeting with all employees to discuss the changes to the funds, and then we had several meetings in which employees could learn the timeline and process for transitioning to the new TIAA-CREF platform,” says Johnson. “We also made it mandatory for every faculty and staff member to meet one-on-one with an adviser from PSA.”

Johnson explains that the advisers supplied a gap statement for each participant and discussed how to close the gap in his or her retirement savings. She notes that some participants previously had done nothing more than put money into their plan accounts, with money then invested in the plan’s default option. These employees had to be educated about the different types of investments they held.

Stout credits the individual meetings with motivating approximately 90% of participants to move their money into the new investment platform. “This is almost unheard of,” she says. “We sat down with every employee, reviewed the change and helped with paperwork if they wanted to transfer their individual contracts over to the trust platform.”

The plan now has a core lineup of 18 funds, as well as a suite of T. Rowe Price target-date funds. The plan still offers an annuity option (the TIAA Traditional fund), “but now participants are much more educated about how to use it,” Stout says.

According to Johnson, 87.15% of the school’s participants are now in a diversified portfolio. “This is a huge increase from previously, when just 5% were in one.”

Reducing Costs

Gilman School was able to reduce investment costs for participants during the transition. Stout explains that TIAA-CREF starts its pricing structure based on an assumption of how many assets will actually move to the platform after conversion. “Generally, about 50% of individual contract assets actually move to new investments,” she says.

The amount of money that moves affects the pricing: As more money moves, fees get lower because assets can be placed in less expensive share classes. Since more than 30% of Gilman’s 403(b) participant assets were transferred from individual annuity contracts to the investments on the TIAA-CREF platform, the school negotiated a less expensive share class for participants. “Had Gilman not put the time into all the participant education, possibly only 30% of assets would have moved and [the school] would still be in the more expensive share class,” Stout says.

Stout acknowledges that due diligence requires Gilman’s plan committee to continuously monitor participant assets and plan design, working with PSA and TIAA-CREF to drive down costs. It anticipates moving to the institutional share class for the T. Rowe Price target-date funds sometime this year. According to Stout, Gilman School and PSA meet every quarter to see whether the plan is eligible for lower-cost funds.

Johnson says Gilman realized that financial wellness for employees “is more than just the balance in their 403(b) plan accounts.” The school has provided a Social Security seminar and two debt elimination seminars. The sessions were very popular and well attended. “Our faculty and staff could not [make] enough great comments about providing these meetings,” she adds.

The school plans to continue to offer seminars once every six months, discussing subjects unrelated to the retirement plan. PSA also provides webinars for employees on topics such as how to teach their children about debt.

“We announced our goals to employees in 2013 and will report the results at our annual meeting,” Johnson says. “We want to get everyone at the school on board with our goals and celebrate the success when we meet them.”

—Rebecca Moore

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