With 2,340 benefits eligible staff and 450 retirees, SMU faced a problem: How will it handle the new IRS and Department of Labor (DOL) requirements for 403(b) retirement plans? Following passage of IRS regulations in 2007, the university found itself accountable for monitoring plan activity to make sure contribution and withdrawal limits were not exceeded. In addition, the DOL’s recent provider and participant fee disclosure requirements mean plan sponsors must choose either to do the impossible and track all funds from countless providers, or pare down to just a few providers—or, in SMU’s case, just one.
Initially, SMU offered its participants funds through three providers—Fidelity, Vanguard and TIAA-CREF. The burden on staff was tripled as they maintained three vendor relationships and spent triple the time and resources, and the legal department had three sets of custodians. Most importantly, the sponsors were doing an injustice to plan participants, requiring them to visit three websites and understand multiple retirement calculators, which affected participant engagement and resulted in underperforming investment choices.
In 2011, SMU was audited by the IRS. “We did what anyone does—served them bad coffee and gave them hard chairs,” Bill Detwiler, associate vice president of human resources and business services at SMU, said during the seminar. While the agency was performing a general audit, it ended up staying for eight weeks, and found one plan participant who had deferrals exceeding limits by $1,500. As a result, SMU was fined $1.1 million, and ended up paying $140,000 and attorney fees. This was a factor encouraging SMU to search for a single vendor.
SMU knew that Fidelity, Vanguard and TIAA-CREF would not necessarily recommend each other’s fund families, and it was looking for an unbiased recordkeeper. It was also aiming to pare down options; its research found that for every 10 funds offered, about 2% of faculty and staff engagement is lost. So, SMU chose Diversified as its recordkeeper, and narrowed down its fund lineup from nearly 500 to about 20.
It now has a single platform with three tiers, including active and passive funds, open architecture and a qualified default investment alternative (QDIA) option. Tier 1 is made up of target-date funds (TDFs); tier 2 contains the core asset class funds; and tier 3 is the open brokerage window, where SMU does not limit contributions, and participants sign a waiver acknowledging that SMU has no fiduciary obligation.
The transition was not “seamless,” Detwiler said. When mapping participants over from their old funds to the new lineup, certain funds in accounts with previous providers were not included, and some petitioned to stay with those funds. This was an oversight on the plan sponsors’ part, Detwiler noted, and it created mapping challenges. If the old funds matched the new investment policy statement (IPS) criteria, they could join the new lineup. For instance, TIAA-CREF Traditional is a popular fund, Detwiler said; SMU froze contributions to this fund, unless they were through Diversified. SMU passed funds such as this through the investment committee and performance filters, and added those that qualified, so that the lineup expanded from 14 to more than 20.
The final challenge in redesigning the plan was communication. SMU was faced with combining human resources, public affairs, Diversified and faculty representatives into one communication team for participants. SMU found the best method was a multi-medium, multi-step process. In addition to e-mails, it also distributed a newsletter for the older age group that might not use e-mail regularly. It also had to solve for how much information to dispense; too much could overwhelm participants, but too little would be considered a lack of transparency. SMU also met with small constituency groups; held town hall meetings covering a high level of information and benefits of the change; hosted group education meetings reviewing details about fund migration and key dates, with an attendance of 40% of the campus population; and held one-on-one enrollment meetings on campus, which saw more than a 50% turnout.
SMU added an on-campus counselor from Diversified as a point person to answer any questions participants might have. It also created the Retirement Plans Advisory Council (RPAC), which advised the plan sponsors about design decisions in a non-fiduciary capacity.
Another issue SMU encountered was during the transition period, or what it calls the “quiet period,” Sheri Starkey, director of total compensation and senior associate director of human resources at SMU, said. When assets were transferred, participants could not see their money for 16 to 20 days, which created an anxiety despite the communication SMU had done in preparation. Additionally, some providers contacted participants individually trying to convince them to maintain their old funds, including older retirees who still had assets.
Ultimately, the change was for the better, SMU said. One advantage of consolidating to a single provider was an overall drop in administrative fees and expenses. Recordkeeping basis points returned to the plan sponsors rather than to the vendor. All plan money aggregated into a single platform, and participants were able to save on fee structure. This also eliminated the complications and confusion of having three different recordkeepers.
Before consolidating to one provider, there were delays in enrollments and other changes because of the paper process, and SMU had to make up lost contributions. Now, employees enroll and make changes online, which is more timely and immediate. Secondly, there is a lessened risk of participants making poor investment decisions with an overwhelming plan lineup of more than 500 funds. The committee works with the investment adviser to screen and choose one fund lineup. Loan administration and hardship withdrawals are also monitored more easily, and the risk of being out of compliance is greatly reduced. Reporting is also less fragmented; reports are available online, and Diversified files the Form 5500.
After all the plan changes, SMU saw a spike in participation. Among all age groups, participation increased an average of 23%. For those younger than 30, at the beginning of 2012, participation was 17%; by the end of the year, that jumped to 34%. There was also a peak in automatic escalation. At the beginning of 2012, no participants auto-escalated; by March, 79 participants did and by October, that number reached 151.