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TRANSCRIPT
Retirement Plans for Institutions of
Higher Education 2015
1
Table of Contents
Executive Summary ..............................................................................................................................................................2
Plan Types: 403(b) Plans Now Offered by Fewer Than Two-Thirds of Institutions of Higher Education ..............................4
Implementing Automatic Enrollment and Stretching Employer Contributions for Better Results ........................................7
Plan Designs that Benefit the Most Committed Participants ...............................................................................................8
Loans and Withdrawals: Increased Loan Availability, Usage, and Default .........................................................................13
Choice Architecture: Role of Advisors in Adoption of Automatic Enrollment ....................................................................14
Investment Options: More Deliberate Decision-Making.....................................................................................................16
Defined Benefit Plans Still a Factor ....................................................................................................................................17
Advisors Becoming More Commonplace ..........................................................................................................................18
Plan Administration, Services, and Expenses ....................................................................................................................20
Strategic Direction: Employee Education ...........................................................................................................................23
Participant Educators More Focused .................................................................................................................................24
Retirement Readiness—Strides in Process........................................................................................................................26
About the Study .................................................................................................................................................................28
Conclusion .........................................................................................................................................................................29
Contact Us .........................................................................................................................................................................29
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Executive Summary
Retirement benefits are undergoing momentous change at institutions of Higher Education in 2015. Challenged by stagnant retirement benefits budgets and the desire to help staff and faculty fund a comfortable retirement, many institutions have availed themselves of the services of a retirement plan advisor or consultant to help transform their retirement benefits program into an effective human resource management tool. Change happening at plans that partner with an advisor or consultant is impacting the field of Higher Education overall.
The old era of non-ERISA 403(b) multi-provider arrangements is clearly behind us. In the new era, institutions are offering a 401(k) plan with a six-month wait for eligibility and an age 21 requirement, auto-enrollment at a default deferral rate 5% or higher, and auto-escalation. The plan offers 21 investment options selected according to a clear investment policy. The employer contribution formula is designed to meet the institution’s budget constraints and the need to help staff and faculty prepare for retirement, matching contributions to 10% of pay. The plan allows participants to take loans and hardship withdrawals. Loan usage is up but hardship withdrawal usage is contained. A participant counselor comes to campus five or six times a year to provide financial guidance and investment advice, and to help the few participants who opted out find a way to enroll in the plan. Most administrative functions are handled by the retirement plan service provider with minimal HR involvement and the provider assumes fiduciary responsibility for these functions. Costs are transparent to participants and equalized for fairness. More than half of staff and faculty are on course to achieve a successful retirement and the budget is under control. Does this picture sound like a dream? This report shows that in 2015, for many Higher Education institutions, the dream has become a reality and most institutions will have followed suit by year end.
For the first time, fewer than two-thirds of institutions are sponsoring a 403(b) plan and nearly half (46%) are sponsoring a 401(k) plan. The percentage of institutions offering individual contracts only has dropped to 40%. As the trend continues, the number of institutions that offer group contracts only will exceed the number of those offering individual contracts by year end. Seventeen percent of institutions partner with a plan advisor or
consultant and twice as many (38%) are considering hiring an advisor in 2015. Eighty-one percent of institutions working with an advisor have an investment policy in place, 77% have completed at least one service provider search in the last five years, and 73% say their service provider acts as a fiduciary on administrative functions. Many rely on their service provider to enroll participants, to process and approve loans, to default loans when needed, and to calculate employer matching contributions and vesting. Three-quarters of institutions partnering with an advisor benefit from the services of a participant counselor coming on campus five or more times a year in most cases. Generally under 10 bps of plan assets, the advisor retainer more than pays for itself and helps enhance participant outcomes. More than half (56%) of institutions partnering with an advisor report average participant contributions exceeding $5,000. Among institutions partnering with an advisor, 63% monitor the retirement readiness of employees and 41% estimate that half or more of their participants are on course to achieve a successful retirement.
In 2015, many institutions allow part-time staff and faculty for the first time as they implement age and service eligibility requirements—often in conjunction with the introduction of a new 401(k) plan. Age 21 is now the most common requirement for plan entry—at 39% of plans. Immediate eligibility for employer contributions is no longer the norm (offered by only 44% of institutions). Three in ten plans offer nonelective employer contributions and an additional 25% offer matching contributions, often up to 10% of pay. Private institutions set themselves apart with 3-year vesting schedules, and public institutions stretch vesting schedules to 10 years. Three in ten institutions offer plan loans; loan usage climbed to 22% but hardship withdrawals are contained. Forty-four percent of plans enroll participants automatically and an additional 27% are contemplating adding automatic enrollment. More than 4 in 10 plans (42%) enroll participants at 5% of pay or better. Only 8.5% of participants opt out. Most institutions rely on a target date series or custom fund as their default election.
This report based on a survey of 276 Higher Education institutions provides clear evidence that in 2015, a page has been turned when it comes to retirement benefits. Change is happening fast.
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Perhaps the main finding from the 2015 edition of the study is the incidence of 403(b) plans among institutions of Higher Education. For the first time, fewer than two out of three institutions (64%) sponsor a non-Roth 403(b) plan. To this day, 403(b) plans have been the dominant type of plan in the Higher Education sector (75% in 2014), but 401(k) plans have become more common and are now offered by nearly half (46%) of institutions to at least some segments of the workforce. Greater workforce mobility between corporate and Higher Education among researchers and staff, the rise of the for-profit Higher Education sector, and economic pressure to streamline retirement benefits all contribute to the trend. The rise of the 401(k) plan will likely continue into the future as Higher Education institutions compete for talent in the labor market. The combination of 403(b) and 401(k) plans is more common at large Higher Education institutions. Institutions with more than 5,000 employees may offer a 403(b) plan to employees in one group (e.g., faculty-only, or faculty and staff of the tax-exempt organization), and a 401(k) plan to employees in another group (e.g., staff-only, employees of for-profit affiliates, or employees who joined the organization after a specified date).
Over the years, more institutions have come to recognize their fiduciary responsibility and the status of their 403(b) retirement savings program as an ERISA plan. To demonstrate deliberate decision-making in the best interest of participants, many have accordingly established plan committees, influenced by outside legal counsel recommending that Boards of Regents and university presidents protect the institutions by creating a decision-making body for the plan. They have also sought and heeded the advice of retirement plan advisors and investment consultants. Today, nearly half (48%) of plans in Higher Education identify themselves as ERISA plans, a level nearly identical to 2014. Two-thirds of institutions rely on one exclusive provider for their plan. On the other hand, 24% recognize their program as a non-ERISA arrangement. In a non-ERISA environment, many institutions historically made multiple vendors available to participants to accommodate a wide range of requests.
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403(b)
Roth 403(b)
401(k)
457(Government)
401(a)
457(b)
Roth 401(k)
457(f)
Defined Contribution Retirement Plans Sponsored
64%75%
48%40%
46%42%
7%8%
19%20%
18%13%
14%16%
10%5%
2015 2014
ERISA
Non-ERISA
Unsure
Plan Status with Regard to ERISA
48%50%
24%24%
28%26%
2015 2014
Plan Status With Regard to ERISA
Exclusive Multi-Vendor
33%
67%
Plan Types: 403(b) Plans Now Offered by Fewer Than Two-Thirds of Institutions of Higher Education
As a result of sponsors’ increasing willingness to recognize their fiduciary status under ERISA, group contracts have become more commonplace among institutions of Higher Education. In 2015, the percentage of institutions that offer only individual contracts dropped to 40%, and the number of plans offering both individual and group contracts rose to 18%. Plans that partner with an advisor are more likely than others (26%) to use both group and individual contracts, perhaps because the advisor suggested the switch. If the current trend continues, we expect the number of plans that offer only group contracts will exceed the number of plans that offer individual contracts only by the end of 2016. Larger institutions and those using multiple providers are less likely than others to use exclusively individual contracts. Group contracts (exclusively) are more popular (44%) among institutions with more than 5,000 employees. With fewer institutions using multi-provider arrangements and more using advisors and consultants, we expect continued growth in the number of plans using group contracts exclusively.
Individual contract (a contract between the participant and the provider) only
Group contract (a contract between theplan sponsor and the provider) only
Both an individual and a group contract
Not sure
Contracts Offered
40%44%
36%35%
18%15%
5%5%
2015 2014
Plan Types: 403(b) Plans Now Offered by Fewer Than Two-Thirds of Institutions of Higher Education
5
66
7
Implementing Automatic Enrollment and Stretching Employer Contributions for Better ResultsParticipant account balances at Higher Education institutions averaged $63,162. The year 2015 was a good one for employee contribution levels. The percentage of participants who contributed $5,000 or more rose to 40% from 35%. Plan design and individual counseling are two effective levers to increase employee contributions. Employees’ tendency to maximize employer contributions has led many employers outside the Higher Education field to modify employer contribution formulas that inspire employees to defer a higher percentage of salary. We attribute this progress to the sudden embrace of practices that have proved effective at raising employee contribution levels in other sectors of the economy. In recent years, many corporate employers have deployed stretch-the-match strategies—modifying their employer contribution allocation formula to reduce the employer match per dollar of employee contributions and raising the ceiling for matching contributions to a higher percentage of pay. This study provides evidence that large numbers of Higher Education institutions embraced the strategy in 2015. Simultaneously, a large number of institutions implemented automatic enrollment and automatic escalation of employee contributions. We believe these developments are the root cause of the increase of employee contributions in Higher Education in 2015. The embrace of these strategies may be at the instigation of advisors. Institutions that partner with an advisor are more likely than others to report average participant contributions of $5,000 or more (56% vs. 37%). Absent plan design changes, one-on-one counseling is the form of communication that education plan sponsors have found most effective at changing employee behavior. This study also documents changes in education and counseling strategies that contribute to participants’ retirement success.
Historically, plans of Higher Education institutions were structured to accept many different types of employee and employer contributions. Mandatory employee contributions are highly unusual in the corporate sector but common in Higher Education. Mandatory contributions are an extreme version of “automatic enrollment.” It is noteworthy that the percentage of Higher Education institutions accepting mandatory employee contributions rose to 31% from 26% in 2015. Although mandatory contributions may have resulted from a defined benefit plan freeze, one might argue employees are better served with a fully funded defined contribution plan than with a poorly funded defined benefit plan.
Less than $1,000
$1,000 – $2,999
$3,000 – $4,999
$5,000 – $6,999
$7,000 – $9,999
Over $10,000
Average Annual Employee Contribution Amount
6%9%
21%18%
40%33%
14%21%
10%11%
9%8%
2015 2014
Employee voluntary/supplemental
Employee mandatory
Employer match
Employer contribution (no employee contribution required)
Contribution Description
62%63%
26%31%
40%41%
9%11%
2015 2014
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Results from the 2015 study tell an interesting story about eligibility for retirement benefits among faculty, researchers, and staff. In an effort to control costs, Higher Education institutions have increasingly relied on adjunct faculty, non-tenure-track faculty, and part-time staff for a variety of functions. Although university systems remain generous in making retirement benefits available to full-time staff and faculty, they appear to be tightening up on retirement benefits eligibility for new employees and instituting age requirements for full-time employees. As a result, the percentage of full-time faculty eligible for the plan contracted to 79% from 84%, and the percentage of eligible full-time staff contracted to 63% from 80% in 2015. These restrictions may come as more institutions implement 401(k) plans. Simultaneously, it appears more institutions are expanding eligibility for part-time staff and faculty, making those positions more attractive to potential candidates, helping to contain the cost of labor and competitiveness. The expansion of eligibility for part-time staff and faculty is particularly prevalent among clients of advisors: 28% of clients with an advisor allow part-time or adjunct faculty to participate (vs. 19% of other institutions). One fifth (20%) of clients with advisors allow part-time staff to participate (only 9% at other institutions).
When it comes to age requirements for plan entry, 38% of Higher Education plans had no minimum age requirement in 2014. The percentage dropped 4 points in 2015, and the percentage of plans with an age 21 requirement increased 11 percentage points to 39% from 28%. Age 21 is now the most common age requirement for plan entry in Higher Education. Institutions that partner with an advisor are more likely than others to use an age requirement for eligibility—age 18 or 21—suggesting the change is a frequent suggestion from advisors. When it comes to service requirements for employee participation, however, the trend is less clear. Forty-one percent of plans still have no service requirement for eligibility. However, the percentage of plans with service requirements of one year or less increased by 4%.
Full-time faculty
Full-time staff
Part-time or adjunct faculty(less than 1,000 hours in a year)
Part-time staff (less than 1,000hours or equivalent in a year)
Eligible Employees
79%84%
63%80%
20%12%
11%9%
2015 2014
No minimum age
Age 18
Age 21
Other
Age Requirement for Eligibility
34%38%
27%32%
39%28%
1%2%
2015 2014
No service requirement
Three months to one year
Less than three months
More than one year
Service Requirement for Eligibility
41%41%
45%43%
6%4%
9%11%
2015 2014
Plan Designs that Benefit the Most Committed Participants
The long tradition of universal availability of 403(b) plan salary deferrals impacts the design of all defined contribution plans at Higher Education institutions. At over half (55%) the Higher Education institutions, employees are eligible to make salary deferrals immediately upon hire. However, waiting periods are becoming more common as a growing number of institutions introduce 401(k) plans. The percentage of plans requiring three months of service rose from 10% in 2013 to 18% in 2014, and those requiring six months to a year of service rose from 4% in 2013 to 12% in 2014. Longer waiting periods help offset the impact of rising staff and faculty turnover on recordkeeping costs and keep fees low for participants.
More than 9 in 10 university systems offer an employer contribution of some sort to employees. There has been little change in the percentage of plans relying on a fixed contribution formula stated in the plan document (66% in 2015); or the percentage offering a discretionary contribution (28% in 2015).
Institutions offering 403(b) plans have more latitude when it comes to employer contribution eligibility than they do with employee contributions. A major development in 2015 is that plans offering immediate eligibility for employer contributions are no longer the majority—falling to 44% from 58%. The trend toward some eligibility requirement started several years ago—typically three months or six months—and accelerated in 2015. The percentage of plans requiring three months of service climbed to 24% and the number of institutions requiring six months of service more than tripled from 5% to 16% of plans.
A �xed contribution statedin the plan document
A discretionary contribution
No employer contributionsare made
Type of Employer Contributions
66%64%
28%27%
7%9%
2015 2014
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Immediately
After up to threemonths of service
After three to sixmonths of service
After six months toa year of service
After more than a year of service
Employee Participation Eligibility
54%
55%
21%18%
13%12%
10%12%
7%7%
2015 2014 Immediately
After up to three months of service
After three to six months of service
After six months to a year of service
After more than ayear of service
Employer Contribution Eligibility
44%58%
24%17%
16%5%
12%14%
8%10%
2015 2014
Plan Designs that Benefit the Most Committed Participants
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Historically, fixed employer contributions stated in the plan document are more common in Higher Education than they are in the corporate sector. This survey documents fast change in the sector that in some respect is bringing Higher Education closer to the practices of the corporate sector. Although fixed contributions stated in plan document are still the norm, the incidence of a fixed percentage of pay formula dropped to 37% from 54% in 2015. It appears large numbers of institutions are favoring a budget approach to employer contributions, moving to a fixed dollar amount formula (up nine percentage points to 30% of plans). Although they are becoming more commonplace, matching formulas represent only a quarter of all plan sponsors. An employer contribution based on a fixed dollar amount, or a money purchase plan, makes sense when a defined benefit plan is frozen. It reduces the risk for the institution and demonstrates a commitment to the employee population. However, in the long run, the contribution of a fixed dollar amount discourages employee contribution and retirement readiness. A matching contribution is more effective at inspiring employees to contribute at a level sufficient to fund an enjoyable retirement lifestyle.
Among plan sponsors that still contribute a stated percentage of pay, the year-over-year trend is toward lower levels of contribution, suggesting employers with higher nonelective employer contributions are also those most likely to switch to a fixed dollar budget. The percentage of employers contributing 2% to 4% of pay rose 4 percentage points to 27% in 2015, while the percentage of employers contributing 5% or 6% of pay decreased to just under 30%. For the same employer contribution budget, a matching employee contribution formula would set a greater number
of participants on a track toward retirement success; a fixed dollar budget best helps contain the cost of benefits within a specific budget.
Among institutions with a matching formula, the trend is to stretch the match to encourage employees to save enough to fund their retirement. Employers who matched 10% of pay or more now make up 29% of employers with a matching contribution, up from 18% in 2014. It appears Higher Education institutions have embraced stretch-the-match strategies at a record pace in 2015. Perhaps the evidence provided by behavioral finance academia strikes a chord in Higher Education more so than in other sectors.
In keeping with tradition, well over half of Higher Education plans in 2015 fully vest employees immediately. However, usage of cliff vesting is continuing to grow in popularity (27% of plans in 2015), perhaps reflecting concern about increased employee turnover. Cliff vesting is popular
A �xed dollar amount
A �xed percentage amount
A formula match of the employee’scontribution (e.g., cents on the dollar)
A percent match of theemployee’s contribution
No contribution
Employer Contribution Formula
30%
21%
37%54%
25%
5%
6%
19%
14%10%
2015 2014
2% – 4%
5% – 6%
7% – 9%
10+%
Fixed Percent Contributed(Stated Percent of Salary—Base)
27%23%
29%36%
16%18%
27%25%
2015 2014
2% – 4%
5% – 6%
7% – 9%
10+%
Fixed Percent Contributed(Stated Percent of Salary—Match)
28%36%
31%36%
12%9%
29%18%
2015 2014
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among larger plans (with 5,000+ participants), 401(k) plan sponsors, and particularly those having implemented auto-escalation of employee contributions. Among plans not using immediate vesting, a 5-year vesting horizon is most common but plan sponsors are increasingly moving to a shorter (3-year) horizon or longer (10-year) horizon. Presumably, institutions of the private sector are moving toward the 3-year horizon and public institutions toward the 10-year horizon not permitted for private employers.
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Immediate full vesting
Cliff vesting
Graded vesting
Vesting Schedule
58%58%
27%25%
15%18%
2015 2014
1 year
2 years
3 years
4 years
5 years
6 years
7 years
8 years
9 years
10 years
11+ years
Fully Vested After . . .
2%7%
7%
7%
7%13%
14%14%
6%
9%
12%11%
11%17%
21%39%
5%
5%
4%
0%
0%1%
2015 2014
1212
Also unchanged from 2014, more than half (54%) of Higher Education institutions apply restrictions to participant withdrawals. Half of institutions place restrictions on the amount that participants can withdraw in a given year. Another 40% apply surrender fees to discourage participants from making untimely withdrawals. Withdrawal
restrictions (e.g., 2.5% surrender charge for withdrawals transfers faster than a schedule of 10 substantially equal payments over 10 years) have been common in the sector to protect providers from the liquidity risk associated with rate guarantees on stable value options.
1313
Loans and Withdrawals: Increased Loan Availability, Usage, and Default Higher Education institutions have historically shied away from offering loans. Recordkeeping of loans in a multi-provider environment presents challenges. As more institutions move to exclusive provider arrangements and some implement a 401(k) plan, loans become more feasible and more institutions start offering them. Another major change in 2015 is that the incidence of loans in Higher Education institutions climbed to 30% from 22%. We believe advisors have a major impact on the availability of loans. The changes advisors frequently recommend and enable (consolidation of providers, outsourcing of services) make it possible for more plans to allow loans. Nearly two-thirds (65%) of plans that partner with an advisor allow loans, compared with only 23% among institutions that do not partner with an advisor. Availability
does not necessarily entail expanded usage. Indeed the median percentage of participants with loans outstanding among Higher Education institutions was 15% in 2015. However, some plans experience exceptionally high loan usage skewing averages—both in terms of usage and default. In 2015, average loan usage climbed to 22% from 19% and defaults to 14% from 6% of loans outstanding
Usage of hardship withdrawals at the one-third of institutions that allow them has not expanded. Plans that partner with an advisor are more likely than others to allow participant hardship withdrawals (59% vs. 27%), but plans that do not partner with an advisor are more likely to report an increase in hardship withdrawals, hinting at the possibility of substitution between some loans and hardship withdrawals.
% of plans allowing
Mean % of participantsborrowing
Mean % of loansin default
Loans
30%22%
22%19%
14%6%
2015 2014
How much you cantake out per year
Surrender fees
Other
Types of Restrictions on Withdrawals
50%43%
40%39%
7%13%
2015 2014
Yes
No
Restrictions on Participant Withdrawals
54%
54%
46%
46%
2015 2014
% of institutions allowing
% of plans citing increase
% of plans citing decrease
% of plans citing no change
Hardship Withdrawals
33%33%
41%39%
14%29%
45%32%
2015 2014
Choice Architecture: Role of Advisors in Adoption of Automatic Enrollment
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Many Higher Education institutions have already enhanced their plan with features designed to help participants save and invest for retirement. Automatic enrollment at a deferral rate above 6% coupled with automatic deferral increases is regarded as the best method of getting retirement plan participants on the proper course to a successful retirement. Higher Education plans have adopted auto-enrollment in larger numbers: the percentage of plans enrolling participants automatically was stable at 44% in 2015, and the number of plans automatically increasing participant deferrals over time reached 24%. We anticipate both features will grow in 2016: 27% of institutions are contemplating adding automatic enrollment and 20% are looking to add automatic deferral increases. Usage of automatic enrollment is particularly high among institutions that employ the services of an advisor, suggesting that advisor recommendation is a major factor driving popularity.
Although Higher Education institutions are aggressively implementing automatic enrollment, the majority are applying automatic enrollment only to new faculty and staff. Less than half (47%) of plans are automatically enrolling existing staff and faculty not previously enrolled, a step many view as critical to make more than a dent in the retirement readiness of an institution’s workforce. Regardless of the population affected by automatic enrollment, opt-out rates are low and declining (median down to 8.5% from 11% in 2015).
The default contribution rate at which Higher Education plans enroll participants automatically in the absence of participant election is most often set at a level between 3% and 5% of pay. Among institutions that avail themselves of an advisor and have implemented automatic enrollment, 42% use a deferral rate of 5% or higher compared with 34% among other institutions that do without an advisor.
A default contribution rate of 4% is not sufficient to put participants who have no other retirement benefit on the path to retirement readiness, but the trend is in the right direction if automatic enrollment is combined with automatic escalation, or with a fixed stated employer contribution. Nearly two-thirds (64%) of Higher Education employers default their participants at the same rate as their own fixed stated level of employer contribution. An increasing number of institutions are defaulting faculty and staff at a rate lower than the employer contribution, giving employees an incentive to take an active role in deciding the level of their contribution.
Automatic enrolllment
Automatic deferralrate increases
Offers Auto Features
44%
44%
24%
23%
2015 2014
Automatic enrolllment
Automatic deferralrate increases
Plans to Offer Auto Features
30%
27%
20%
18%
2015 2014
New faculty and staff
Existing faculty and staff
Employees Automatically Enrolled
90%
70%
47%
42%
2015 2014
Choice Architecture: Role of Advisors in Adoption of Automatic Enrollment
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Today, 31% of Higher Education plans using automatic enrollment invest contributions in an asset allocation fund by default (target date or target risk series). More plans rely on a balanced fund as their default investment option. On the other hand, reliance on default options such as a money market fund or stable value products that do not enjoy qualified default investment alternative (QDIA) status is down. Generally, plans partnering with an advisor more often turn to an asset allocation series: 56% use a target date series as the default investment elections but a balanced fund is the most common default investment option among institutions that do not rely on an advisor for decision-making.
At the institution’scontribution rate
Below the institution’scontribution rate
Above the institution’scontribution rate
Default Contribution Percentage Relative to Institution’s Contribution Rate
64%68%
33%22%
3%11%
2015 2014
Asset allocation (lifestyle/lifecycle/target date)
Balanced
Index
Money Market
Stable value
Default Investment Option
35%
31%
43%39%
9%
2%
2%
16%
10%8%
2015 2014
Less than 3%
3%
4%
5%
6%
More than 6%
Average Annual Employee Contribution Amount
18%19%
28%24%
16%22%
18%
20%
6%7%
14%9%
2015 2014
Investment Options: More Deliberate Decision-Making Higher Education plan sponsors have historically refrained from exercising discretion over investment arrays, but 60% of Higher Education plans now have a stated investment policy in place and institutions offer 21 investment options on average. An investment policy statement (IPS) is particularly common among institutions that partner with an advisor (81%). The majority (57%) of institutions that do not use a retirement plan investment advisor rely on their recordkeeping service provider(s) to monitor the performance of investment options. Currently, among Higher Education plans with a QDIA, 34% use a target date fund series as their QDIA and 25% rely on a custom asset allocation model instead. The recent trend has been to move away from balanced funds, particularly among plans working with an advisor. Among plans that use automatic enrollment, nearly half (47%) of those that partner with an advisor rely on a target date series as their QDIA.
Just under 30% of Higher Education institutions include a stable value option in the investment array. Employees of not-for-profit and public institutions have historically favored fixed interest accounts combining rate guarantees and liquidity restrictions, to which 403(b) plans are limited. The stable value category is broader than general accounts and the range of possibilities grows for plans other than 403(b). Institutions that partner with an advisor are much more likely (59%) than other plans to offer a stable value option.
Target date fund
Balanced fund
Custom target date fund
Stable/Fixed option
QDIA Options Chosen by Institutions
34%29%
31%36%
25%24%
10%9%
2015 2014
16
Yes
No
Institutions with Investment Policy Statement
63%
60%
40%
37%
2015 2014
Yes
No
Unsure
Percent of Plans that Offer a Stable Value Fund
29%31%
47%44%
24%26%
2015 2014
1717
Defined Benefit Plans Still a FactorDefined benefit (DB) plans are still fairly common at Higher Education institutions. Four out of five institutions offer a DB plan, and three out of five DB plans are active. DB plans are most common at larger institutions. The trends that have affected corporate employers in the recent past are likely to affect Higher Education in the next 5 to 10 years: plan freezes, plan termination, increased reliance on defined contribution (DC) plans, and employee funding of these plans. Because they have adopted innovation in DC plans more rapidly than employers of the corporate sector, many Higher Education institutions are in a better position to take the necessary steps with their DB plans than employers of the corporate sector were before the enactment of the Pension Protection Act and definition of safe harbors that made it possible for employers to rely exclusively on DC plans for retirement benefits.
Yes, a legacy plan only
Yes, an active plan only
Yes, both a legacy and active plan
None
Defined Benefit Plans
31%32%
22%24%
25%24%
22%26%
2015 2014
1818
An increasing number of Higher Education institutions are partnering with retirement plan advisors and consultants to help manage retirement benefits. Seventeen percent of institutions surveyed in 2015 have a retirement plan advisor or consultant. More than twice as many (38%) intend to hire an advisor in the next 12 months. Today, most plans that partner with an advisor or consultant follow a deliberate selection process to choose their advisor. Not-for-profit (public and private) and faith-based institutions are more likely than for-profit university systems to rely on the services of an advisor. Survey results attest to the difference an advisor can make on the retirement benefits strategy of an organization. Institutions that rely on an advisor or consultant are ahead of peers in a number of respects: retirement readiness of employees, approach to investment selection, plan design and adoption of innovation such as automatic enrollment, ability to allow loans, and range of services outsourced to the recordkeeping service provider.
Higher Education institutions rely on their advisor or consultant primarily to assist with investment selection, investment monitoring, and plan compliance, but the range of services the advisor performs varies widely from one institution to the next. Perhaps because their HR department is more thinly staffed, smaller institutions with 5,000 or fewer participants frequently rely on their advisor or consultant for a broader range of services. Smaller institutions frequently retain their advisor to act as a plan fiduciary, to assist with plan design changes, to formulate an investment policy statement, and to help select the retirement plan service vendor(s).
Advisors are most often hired on a retainer basis and more than half of Higher Education institutions pay their advisor an asset-based fee, typically under 10 basis points (72% of plans). Fees are most commonly paid out of participant accounts (28%) or out of an expense reimbursement account (23%). Large Higher Education institutions are more likely than smaller ones to hire their advisor or consultant on a per- project basis, with an asset-based budget in the range of 5 to 10 bps.
Yes
No, but we have plans to hireone within the next 12 months
No
Advisor/Consultant Usage
17%
38%
45%
Investment selection
Ongoing investment monitoring
Act as the plan �duciary
Plan compliance
Plan design
Development of the investment policy statement
Vendor selection
Advisor Responsibilities
61%40%
55%31%
30%38%
50%42%
43%38%
36%22%
25%11%
2015 2014
Advisors Becoming More Commonplace
A per-project basis
A retainer
Other
Advisor Hired
42%33%
56%58%
2%9%
2015 2014
Higher Education institutions that partner with a retirement plan advisor or consultant benefit in many ways: four in five (81%) have an investment policy statement (compared to 56% for plan sponsors that do not partner with an advisor). They are better able to leverage their recordkeeping service provider for outsourced services such as loan approval, loan default monitoring, safe harbor hardship withdrawals, paperless enrollment, required minimum distributions, QDRO processing, and signature-ready 5500 preparation. In turn, these services allow the institution to provide a higher level of participant service. For instance, institutions with an advisor are most likely to allow participant loans and hardship withdrawals. They are also most likely to offer a stable value option (59% vs. 23%). More than three-quarters of institutions partnering with an advisor benefit of a participant educator from the service provider who meets in person with faculty and staff. Irrespective of the services the advisor is hired to provide, most plans meet with their advisor quarterly; the frequency of meetings is trending up. With all these benefits, it’s no wonder the majority of plan sponsors (56%) who use the services of an advisor are very satisfied with their advisor.
19
Very satis�ed
Somewhat satis�ed
Not very satis�ed
Not at all satis�ed
Satisfaction with Advisor or Consultant
56%
35%
9%
0%
Advisors Becoming More Commonplace
Asset-based fee
Hard dollar fee—one time only
Hard dollar fee—more than onetime (e.g., quarterly, yearly)
Don’t know/not sure
Type of Fee Paid to Advisor
51%48%
16%22%
14%15%
19%15%
2015 2014
Less than 5 bps
5 to 10 bps
11 to 15 bps
More than 15 bps
Amount of Fee Paid to Advisor
45%32%
27%32%
9%23%
19%14%
2015 2014
An expense/ERISA budget account
Participant accounts
Plan investments
Direct bill
How Advisor/Consultant Fees Are Paid
23%22%
28%11%
15%35%
18%22%
2015 2014
Monthly
Quarterly
Semi-annually
Annually
Frequency of Meeting with Advisor
23%20%
51%48%
12%22%
14%11%
2015 2014
20
Nearly three-quarters (73%) of Higher Education institutions that partner with a retirement plan advisor and 51% of other plan sponsors report that their provider acts as a fiduciary on administrative functions. Chief among the functions sponsors outsource are the calculation of the employer match and vesting calculations, paperless enrollments, paperless loan processing, loan approval, and loan default monitoring. This study demonstrates that institutions that partner with an advisor or consultant extract more value out of their recordkeeping service provider in the form of outsourced services. The presence (and presumably intervention) of an advisor appears to be a major factor in plan sponsors' ability to leverage services available from recordkeeping service providers. Although only 18% of all institutions outsource paperless enrollments to their recordkeeper, the incidence jumps to 26% among institutions that partner with an advisor. Only 24% of all institutions rely on their service provider to approve loans, but the incidence jumps to 35% among clients of advisors. The same holds true for many services including vesting calculations and QDRO processing. Two-thirds of institutions are contemplating outsourcing even more services in the near future.
The cost associated with administering the retirement plan can be covered by four sources: the sponsoring institution directly, investment managers whose funds are offered in the plan directly (in the form of 12-b-1 fees for example), an expense or ERISA budget account fed by revenue from investment managers (sub-transfer agent recordkeeping compensation for example), or from plan participant accounts directly if other revenue sources are insufficient to cover expenses. Employee benefit budgets are increasingly challenged, and institutions must rely on other sources to cover administrative costs. As institutions rely more on group contracts, institutional share classes, and low-cost investment options, revenue from plan investments becomes insufficient to cover additional expenses. Expense or ERISA budget accounts set up in part to levelize the cost of administering the plan across participants grow more popular, now used by 23% of Higher Education institutions overall, and 35% of those who partner with an advisor or consultant. Institutions that need to charge participant accounts to cover the full cost of administration now represent 38% of all institutions and only 33% of institutions that partner with an advisor. Many institutions hiring an advisor to help with the retirement plan may well be motivated by the desire to contain participant outlays.
Calculation of employer match
Loan approval
Vesting calculation
Paperless loans
Paperless enrollments
Loan default monitoring
Safe harbor hardship approval
Rollover veri�cation services
Quali�ed domestic relations order
5500 preparation
In-service withdrawal approval
Bene�ciary designation services
Contribution limit monitoring
Required minimum distributions
Common remit services
Termination/serverance from employment
Coordination of processing of involuntary
None of the above
Outsourcing of Functions – 2015
30%7%
24%10%
18%
18%
7%
18%
10%
12%
18%9%
16%
9%
15%6%
14%10%
13%5%
13%11%
12%5%
12%11%
10%2%
9%3%
9%9%
8%5%
17%
33%
Currently outsource Plan to outsource
Plan Administration, Services, and Expenses
2121
Revenue equalization and fee fairness are current themes in the retirement plan business. Without revenue equalization, participants make an uneven contribution to the cost of administrative service: participants who invest in funds that pay higher 12-b-1 and sub-transfer agent compensation support a greater share of the recordkeeper’s cost of providing share accounting and compliance services, while other participants do not carry their own weight. Our survey finds the percentage of institutions that have implemented revenue equalization unchanged at 55% of all plans. An increasing number are applying the same recordkeeping fees across all participants but few are deploying an ERISA budget or expense budget account, the option most popular in the corporate world.
Participant accounts
Plan investments
Direct bill
An expense/ERISA budget account
How Plan Expenses Are Paid
38%
35%
26%30%
23%18%
19%19%
2015 2014
Plan Administration, Services, and Expenses
Fees are applied to each of the funds theparticipant is invested in and differ depending
on the revenue sharing for the fund
Fees are applied to each of the funds theparticipants are invested in and are the
same across all funds
All revenue sharing payments are creditedback to the participants accounts based
on the funds they are invested in and theemployer pays the fees for the plan
All revenue sharing payments are creditedto an expense budget account and then
fees are paid from this account
Other
How Fees Are Handled
45%
45%
37%31%
11%
1%
2%
16%
6%6%
2015 2014
Does Provider Act as Fiduciaryon Administrative Functions
Yes
No
61%
39%
2015
Yes, for a fee
Yes, without a fee
No, does not provide
Does Provider Provide a Signature-Ready Form?
37%30%
32%37%
31%33%
2015 2014
Your institution only
The recordkeeper only
Both institution and recordkeeper
Does Provider Include Logos on Communication?
42%38%
33%37%
25%24%
2015 2014
Yes
No
Does Provider Create a Customized Webpage for You Plan?
57%
56%
44%
48%
2015 2014
2222
Strategic Direction: Employee Education Improving participant education tops the list of actions institutions made in the last 12 to 24 months to enhance their retirement plan. Other changes are mentioned less often (e.g., adding Roth 401(k) contribution type, adding investment options, reducing the number of retirement plans offered, offering financial planning). Going forward, however, new priorities have emerged in 2015 including adding investment options and adding Roth 401(k) plan contribution types.
23
Improve employee education
Add Roth 401(k)
Add investment options
Reduce the number ofretirement plans offered
Offer �nancial planning
Add Roth 403(b)
Consolidate recordkeeping for multiple plans
Reduce the number of providers
Create written plan documents
Change recordkeeper
Consolidate investments for multiple plans
Change advisor
Reinstate the employer contribution
Transition to custom plandesign from prototype plan
Eliminate employer contribution
Adopt a prototype plan
Reduce the employer contribution
Change the way plan expenses are paid
Add a managed account/advice option
Implementing Plan Changes
18%10%
15%13%
14%
13%
15%
13%
7%
12%
12%10%
11%10%
11%6%
10%9%
10%8%
10%10%
8%11%
7%5%
7%6%
6%6%
5%2%
5%4%
4%
2%
4%3%
Changes made inpast 12 – 24 months
Changes planned innext 12 months
24
Fewer than 4 in 10 (39%) of Higher Education institutions say that a participant educator employed by their plan provider visits with participants on campus. However, three-quarters (76%) of institutions working with an advisor say a participant educator comes on campus to help faculty and staff with retirement decisions (up from 61% in 2014). In a shift from years past, most institutions report educators visit campus at least five times a year, with one-third indicating participant educators visit 11 or more times each year. This is a significant increase over the frequency reported in 2014, perhaps symptomatic of the increased education effort institutions are reporting in this survey.
Provider due diligence activity is continuing to grow among plan sponsors of the Higher Education sector, raising the knowledge and understanding of service models and cost. In particular, institutions have greatly enhanced their understanding of participant educator compensation. Nearly 40% know for a fact participant educators visiting campus are salaried, and fewer (19%) rely on educators who are paid strictly on commission. However, one-third remain unaware of how participant educators are compensated. The percentage of those who do not know how their educator is compensated is even higher (36%) among institutions that do not partner with an advisor. Institutions that partner with an advisor are more likely to report their educator receives salary plus bonus compensation.
Higher Education institutions changed the focus of participant educator activity in 2015. More institutions are relying on educators to give financial guidance and investment advice. Although providing retirement income planning is still among the top three most important roles, attention to this objective seems to be slipping. Our read is that plan sponsors are looking for educators to do fewer things but to do them well, and to focus on counseling functions that provide value to the largest numbers. Clients of advisors place even more emphasis than their peers on enrollment, general education, and investment advice.
Yes
Does a Participant EducatorCome to Your Location?
39%46%
2015 2014
Commission
Salary
Salary and bonus
Don’t know
How Participant Educator Gets Paid
19%26%
39%38%
9%6%
33%30%
2015 2014
1 – 2
3 – 4
5 – 6
7 – 10
11+
Number of Days per Year thatParticipant Educator Visits
29%27%
20%24%
9%24%
8%8%
33%17%
2015 2014
Participant Educators More Focused
25
As Higher Education institutions attempt to match the offerings, investments, and return potential of corporate plans, the frequency of due diligence provider searches increases. Nearly 7 in 10 institutions (69%) have put their plan out to bid at least once in the last five years, up from 51% in 2014. Search activity is particularly strong (77%) among clients of advisors—nearly double the level registered in this group in 2014. Institutions with a 403(b) plan and those with multiple providers are the categories most likely to have increased search activity between 2014 and 2015 (respectively +72% and +64%). Many have conducted a search more than once over the last five years, most notably very large institutions (with 5,000 or more participants). More than 83% of institutions using auto-escalate have conducted a search in the last five years, suggesting the implementation of auto-escalation came as a result of the search and may have been a factor in provider selection.
Participant Educators More Focused
Give general �nancial guidance
Provide investment advice
Provide retirement income planning
Provide education to staff
Enroll faculty and staff
Assist employee understandingof the plan
Improve employee appreciationof the plan
Provide staff with post-retirementproducts and solutions
Role of Participant Educator
55%48%
54%46%
52%61%
45%44%
44%44%
38%46%
34%37%
17%20%
2015 2014
25
2626
Retirement Readiness—Strides in ProcessAlthough retirement readiness is the most talked about issue in the retirement industry today, just 43% of Higher Education institutions monitor the retirement readiness of their retirement plan participants, down from 47% in 2014. Those who rely on an advisor are more attentive to retirement than others (63% monitor how prepared for retirement staff and faculty will be vs. 39% of other plan sponsors). On the other hand, institutions with multiple vendors are least attentive to retirement readiness (38%), even though they made progress (23% in 2014). When assessing the retirement readiness of staff and faculty, most institutions rely primarily on account balances and contribution rates, followed to a lesser degree by use of automatic deferral escalation, income replacement ratios, and the existence of other retirement accounts outside to institution.
Slightly more than one-third (36%) of Higher Education institutions estimate that 50% or more of their employee population is on course for a successful retirement. Those that partner with an advisor or consultant appear to be ahead: 41% estimate that half or more of their participants are on course to achieve a fully funded retirement. Both statistics show Higher Education institutions lagging behind the rate observed in corporate plans in the Retirement Advisor Council 2014 report1 showing three-quarters of plans working with an advisor with 50% or more of plan participants on course to achieve a successful retirement. We believe the move to exclusive arrangements with single service providers, and the decision by many institutions to retain an advisor or consultant will begin to bridge the gap in retirement readiness in 2016.
1 “ Partner with a Professional Retirement Plan Advisor and Achieve Higher Participant Retirement Readiness Scores,” Retirement Advisor Council, July 30, 2014, retirementadvisor.us/enhance-retirement-readiness.
Party that Administers the Plan
Money manager also actingas a recordkeeper
Recordkeeper who isn’t actingas a money manager
70%
30%
2015
Yes
No
Does the Recordkeeper Monitor Retirement Readiness
47%
43%
57%
53%
2015 2014
Account balances
Contribution Rates
Use of automaticdeferral escalation
income replacement ration
Presence of other retirementaccounts, ouside of your plan
What is Looked at When MeasuringRetirement Readiness
48%
32%
45%31%
22%18%
18%9%
7%4%
2015 2014
0
1 time
2 times
3 times
More than 3 times
Number of Times Plan Put Outto Bid in Last Five Years
29%
49%
33%19%
27%27%
9%4%
2%
1%
2015 2014
27
0%
1 – 25%
26 – 50%
51 – 75%
76 – 100%
Not sure
Percent of Staff on Course for Retirement
1%2%
19%19%
39%35%
29%24%
4%12%
8%9%
2015 2014
0%
1 – 25%
26 – 50%
51 – 75%
76 – 100%
Not sure
Percent of Staff on Course for Retirement—by Age Group
3%2%
22%19%
35%35%
23%24%
9%12%
9%9%
2015 2014
28
About the StudyThis report presents results of a survey of over 250 plan sponsors at institutions of Higher Education conducted in May 2015. A sample size allows us to show year-over-year trends and to analyze data by segments such as size band, plans with an exclusive provider vs. multi-vendor situations, and plans with and without an advisor to a greater extent than we were able to in 2014. The 2015 sample includes 166 public and 110 private institutions, the majority of which are four-year colleges or universities; the 2015 sample also includes a slightly higher proportion of institutions with more than 5,000 employees. Differences in sample composition impact year-over-year comparisons.
Traditionally, plans at private institutions are more active in performing due diligence and behave more like corporate plans. Plans at public institutions are more likely to rely on multiple providers and to be less aggressive in performing due diligence of service providers available on campus. However, the trend even for public institutions is to emulate corporate plan standards as a best practice. For example, Higher Education plans are traditionally more likely than corporate plans to work with more than one service provider. In 2013, 48% of Higher Education plans characterized their plan as “multi-vendor,” but in 2015, only 33% of institutions characterize their plan as multi-vendor. The trend is toward a single recordkeeper.
Plans in the multi-vendor segment use fewer service providers than they once did. In 2013, 23% of the multi-vendor segment used six or more providers. None did in the 2014 sample. In 2015, only 16% of respondents used six or more providers, but one-third used three providers.
2
3
4
5
6 or more
Number of Service Providers
33%62%
32%10%
4%17%
15%10%
16%0%
2015 2014
Public
Private
Public vs. Private Institutions of Higher Education
56%
60%
40%
44%
2015 2014
Over 5,000 employees
Under 5,000 employees
Number of Employees
27%
30%
70%
73%
2015 2014
Exclusive
Multi-vendor
Type of Arrangement
67%
72%
33%
28%
2015 2014
29
Contact UsGrace Basile
Director, Market ResearchTransamerica Retirement [email protected]
Wendy Daniels
Senior Vice President, MarketingTransamerica Retirement [email protected]
© 2015 Transamerica Retirement Solutions, LLC. All rights reserved. Displays or reproductions of any part of this material must include the following mention on every page: “Source: Transamerica Retirement Solutions’ Retirement Plans for Institutions of Higher Education—2015.” Submit requests for display or reproduction to the contacts listed on this page.
PLAN SPONSOR AND FINANCIAL PROFESSIONAL USE ONLY.
ConclusionThis report documents a momentous change of pace and frequent provider due diligence searches in the Higher Education sector. Competition for talent from scientific organizations, market forces, and cost pressures lead institutions to overhaul the design of their retirement program to consolidate provider relationships and hire advisors—often acting in a fiduciary capacity to help implement reforms sorely needed to enhance participants’ likelihood of retirement success. In the process, new
features such as loans, automatic enrollment, and automatic escalation are added to the plan. The availability of loans spurred usage and defaults in 2015, but we believe that auto-enrollment and auto-escalation combined with increased reliance on participant counseling staff for core functions will have a major net-positive effect on the retirement readiness of participants starting in 2016. Higher Education institutions’ retirement plans are on the right path.
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19586-PS_B (12/15) © 2015 Transamerica Retirement Solutions, LLC