Total Plan Assets/Participants: $101 million/1,688
Participation Rate: 96%
Average Deferral Rate: 6.8%
Default Deferral: 5.3%
Default Investment: Vanguard target-date funds
Match: 100% of up to 5.3% of salary
Other plans: None
IN APRIL 2010, Gillette Children’s Specialty Healthcare, whose main hospital campus is in St. Paul, Minnesota, implemented automatic enrollment for its 403(b) plan, defaulting participants at a deferral of 4% of salary. The company offered a match of up to 2% and provided all employees with a discretionary contribution of 3.29%. Still, something was missing. “As we reviewed our participation, deferral rates and average account balances, we determined that the program didn’t encourage employees to contribute to their retirement funds—something we believe is necessary to saving enough for retirement,” says Kit Brady, vice president of human resources (HR), education and guest experience at Gillette. The hospital was especially concerned about the number of employees who contributed only enough to get the 2% matching contribution.
To encourage higher deferrals, last January Gillette took the not-so-intuitive action of eliminating the discretionary contribution to the 403(b) and changing to a match of 5.3% of salary. The hospital also increased the automatic default deferral to 5.3%, so automatically enrolled employees who did not change their deferral rate would get the full match.
“It took a lot of discussion over a long period of time to come to the decision to drop the discretionary contribution, but we found that many participants were only contributing 2% to get the match, and we felt 2% is not enough for them to save on their own,” Brady says. “On the one hand, we felt good we were giving a discretionary contribution to all employees, but we saw that the plan design was not encouraging people to save enough.” Because Gillette did not want to contribute less to employees’ retirement than before, it chose to match 5.3% of salary, he adds.
When the hospital originally automatically enrolled employees, Brady says, employees seemed happy for Gillette to set the amount and most did not change it. When the hospital re-enrolled employees at a higher percentage, it saw the same result—participants did not move their deferral percentage back down.
In 12 months—June 2013 to the following summer—the changes produced a 27% increase in total plan assets, from $79.5 million to $101 million; a 17% increase in participation, from 82% to 96%; and an 8% increase in the average deferral rate, from 6.3% to 6.8%.
Working with its plan provider, Lincoln Financial Group, in Radnor, Pennsylvania, Gillette also implemented more intuitive best practices. To reduce investment expenses and simplify choices, the hospital replaced several funds in its investment lineup, including the qualified default investment alternative (QDIA), with funds that are less expensive than those participants had been in previously. To make it easier for employees to invest in an age-appropriate manner, it re-enrolled participants into the new QDIA—Vanguard target-date funds (TDFs)—with the choice to opt out. As a result, the 403(b) plan saw more assets move into target-date funds—going from 51% to 84% of total assets.
To educate employees about the plan changes, Gillette employed a multichannel strategy. Notification packets were mailed to employees’ home addresses, and employees were given an educational Brainshark presentation, narrated by HR leaders, via email. At the same time, Lincoln Financial retirement consultants held one-on-one meetings with physicians and executives, and facilitated 12 group meetings at Gillette’s two campuses.
“On the one hand, we felt good we were giving a discretionary contribution to all employees, but we saw that the plan design was not encouraging people to save enough.”
“Whenever you tell employees that their benefits are changing, it can make them very fearful. So you have to have a good communication plan,” Brady says. “We pointed out that many companies are cutting benefits, but we were making changes that are good for participants. It’s important to communicate well when making changes.” She adds that one of the challenges for hospitals is that most employees are busy providing direct patient care and cannot get away to attend meetings during the day; also, they might check email only sporadically. So, Gillette uses many strategies to communicate with employees.
Annually, Brady says, her team at Gillette, along with plan adviser Dan Esch from CAPTRUST Financial Advisors, in Minneapolis, reviews investment expenses compared with other plans. The hospital decided that, to reward active employees, it would adopt a tiered-pricing structure. Active employees pay $20 a year in administrative fees, while inactive employees pay $95 a year.
“Wanting to take good care of our employees, we did not want to pass a lot of fees on to them, so we kept their fees low,” Brady says. “We don’t force terminated employees out unless they have a low balance; we feel we have a good plan and people can stay, even if they leave employment, but we decided to support fees for active employees.”
From Net to Gross Pricing
In addition, to increase fee transparency and decrease dependency on investment fund revenue, Gillette moved from net to gross pricing with Lincoln. Under a net pricing arrangement, the service provider furnishes plan administrative services in exchange for mutual fund revenue sharing received from plan investments—which can result in mutual fund revenue being too much or too little to satisfy the compensation target set by the provider. “This is an arrangement that lacks transparency and makes it difficult for a plan sponsor to know exactly what is the cost of administration,” Lincoln Financial notes.
Under a gross pricing arrangement, the provider explicitly states the cost to administer the plan. Mutual fund revenues are still collected, and any amounts in excess of the stated cost are placed into a plan expense account for use by the sponsor to cover qualified plan fees or to be redistributed to participants. If there was too little fund revenue to cover the cost of administration, the sponsor would be provided with options to pay the difference. According to Lincoln, “This approach provides complete transparency to the sponsor and participants around plan fees and makes it very easy to benchmark administrative costs in the market, ensuring that plans remain competitively priced.”
“I am really proud of how we were able to increase participation as well as average deferrals,” says Brady. “I feel much better sleeping at night with this plan and the work we did to help people with being able to retire when they want. We did that not just with automatic enrollment but with re-enrolling into target-date funds. Few of us are very good at investing, so those target-date models made it simple to invest well.”
Brady adds that the results from changes Gillette made surpassed expectations and laid the foundation for future enhancements aimed at helping employees save even more for their financial futures. The health system has been named by the Star Tribune as one of Minnesota’s top workplaces for four years running, and hopes to continue to improve its workplace retirement program even more in the future. The hospital is considering automatic deferral increases and is planning a retirement readiness communication campaign; it also wants to regularly measure whether participants are saving enough to replace a certain percentage of income in retirement.
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