Hugh Penney
Senior Director of Compensation and Benefits
  • Plan(s)
  • Total Plan Assets
  • Number of Participants
  • Participation Rate
  • Average Deferral Rate
  • Default Deferral Rate
  • Default Investment
    RetirePlus Pro Models, custom QDIA
  • Automatic Enrollment
  • Automatic Escalation
  • Employer Contribution
    100% match of 5%
  • Provider(s)
    Recordkeeper, TIAA; Adviser, Aon
  • Financial Wellness Educator(s)
    TIAA and university-provided

As Penney explains it, the QDIA is “a managed account with quarterly rebalancing of custom portfolios that behaves like a target-date fund.”

Stephen J. Campbell, senior relationship manager, institutional retirement, at TIAA in Waltham, Massachusetts, has been the relationship manager for the Yale University 403(b) plan since 2007, working with Hugh Penney, senior director of compensation and benefits, and his team. Campbell says the plan is among the industry leaders.

“I’ve worked with TIAA more than 30 years, and I’ve never worked with an administrative team with this much focus,” Campbell says. “Hugh pushes the envelope on design and has prioritized making engagement and planning by participants more robust. He believes the program is only as successful as participant engagement and that design matters. With compliance in mind, he’s always thinking about what is the next element to improve the program.”

For example, Campbell says, Penney introduced automatic enrollment in 2009 after discovering that some employees had never joined the plan because they felt they couldn’t afford to. Penney also noticed that those who hadn’t enrolled didn’t revisit that decision. So he went to the investment committee to implement annual re-enrollment, Campbell says.

Making saving easy

As one would expect from a prestigious institution of higher education, Yale, located in New Haven, Connecticut, has adopted all of the innovative plan design features intended to give its employees a secure retirement. New hires are immediately both eligible for the plan—automatically enrolled in the qualified default investment alternative (QDIA) at 5%, the default deferral rate—and vested in employer contributions. Deferrals are escalated 1% annually, up to 10%. Employees may defer savings to a pre-tax or Roth account, and the plan allows for in-plan Roth conversions.

Yale matches 100% of employees’ 5% deferrals and contributes a 5% equivalent of compensation to every employee whether the person defers or not. However, Penney stresses, every plan participant makes deferrals. Employees are re-enrolled every year at the 5% rate, if they defer less.

Unlike most traditional 403(b) plans, Yale’s was never a multi-annuity provider plan. “We were TIAA’s 28th or 29th client in 1919, and it’s the only annuity provider we’ve had in our investment lineup,” says Penney. “When [the Employee Retirement Income Security Act] made mutual funds available as investments in 403(b) plans, we added a provider and had two recordkeepers until 2015, but, other than that, we’ve never had a multiple-provider arrangement.”

In 2015, Penney determined that moving to a single recordkeeper would help change the “vendor plan” mindset of some participants to a “Yale plan” mindset, according to Campbell. This allowed for a single source of communications and advice, and reduced costs.

As soon as Penney was done with that, he turned to improving plan investments, Campbell says. Last year, the school implemented a new investment lineup consisting of mutual funds, variable annuities and a guaranteed annuity. It also built a custom QDIA using those investments.

As Penney explains it, the QDIA is “a managed account with quarterly rebalancing of custom portfolios that behaves like a target-date fund [TDF].” TIAA had a product it used primarily with smaller clients; that became the foundation on which it built Yale’s QDIA, Penney recalls. “We liked the concept of the product and the ability to have custom investments built for participants, using institutionally priced funds in our plan lineup, but we worked on enhancements.”

Dubbed the RetirePlus Pro Models, the funds work like managed accounts in that participants are assigned their fund according to personal criteria such as age, any additional retirement savings they have beyond the 403(b) and the amount they have saved in individual annuities.

Penney says half of the plan’s assets are in legacy annuity contracts, and the QDIA adjusts a participant’s investments according to the person’s legacy annuity holdings. If, for example, that amount is large, the participant is considered heavily invested in fixed income, so the QDIA would place him in a model fund that provides him with balance.

When it comes to fixed-income investments, Penney says one of the most significant features of the QDIA is it has no bond fund. “Instead, the group guaranteed-annuity investment is akin to a high-performing stable value investment that has an annuity option,” he says. “An annuity, unlike a bond fund, is guaranteed to go up every year. When the market went down 10% during the financial crisis, annuities didn’t.”

The QDIA also offers both conservative and aggressive funds that participants can be placed in based on whether they have other outside savings. All participants were swept into the QDIA a year ago February; 96% have remained invested in it, and, of that group, 7% have personalized their investments further, either by changing their target date or choosing a parallel glide path.

Campbell says much anecdotal evidence for the QDIA’s value has appeared, in the form of participants contacting the call center expressing relief at having that investment product during the market volatility this year. He notes that the portfolios use drift rebalancing, meaning if a participant’s portfolio takes a more than 3% departure from its allocation, it is rebalanced back to the participant’s ideal allocation—something Penney requested.

Satisfied participants

More initiatives to improve the participant experience are in the works, according to Campbell. These include greater personalization of portfolios to reflect, if the worker wishes, any additional assets, or to adjust his portfolio glide path based on his changing risk tolerance. Another initiative is enabling participants who retire to receive distributions from their TIAA traditional annuity but keep the managed account piece of the custom portfolio for equity investments. “Participants would still want someone to manage equity after retirement,” Campbell observes.

“Yale is an ideal client we love to partner with,” he says. “Hugh is smart—he reads journals, talks to peers and theorizes. He’s always open to ideas and [to] being the first one to pilot something, but he does his homework and makes sure it is well-thought-out. He wants to have the best retirement program in the country, much less in higher education.”

“We really think of this as a retirement plan,” Penney says. “University employees stay in the plan for the rest of their lives, and, in many cases, [so do] their spouses. We’ve designed the plan for successful retirement outcomes, which includes developing effective retirement income strategies.” The plan also offers installment payments and allows for rollovers of additional assets into the plan after an employee has left Yale.

“At retirement, only a small population rolls out of the plan. We don’t go through a marketing effort to keep their assets in the plan; it’s the nature of the plan design and the culture at Yale,” Penney says. “We still have an active retiree health plan, and employees maintain a relationship with us long after they’ve left the university.” —Rebecca Moore

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