Higher Education Plan Sponsors Step Up Their Game

“Plan sponsors want to adopt best practices,” Michael Volo, senior partner with Cammack Retirement Group in Wellesley, Massachusetts, tells PLANADVISER. “They are more focused on fees, simplifying plan administration and engaging participants.”

The big trend is the increased awareness of plan costs—driven by fee disclosure regulations and more plan sponsors working with consultants and advisers, Volo says. According to the fourth edition of the Higher Education Retirement Plan Survey from Cammack Retirement, 52% of respondents said they have negotiated fees with their vendors in the last 24 months. The same percentage said they have benchmarked their vendor’s required revenue against peer institutions.

In addition, 62% of respondents are using an expense reimbursement account to pay permissible expenses from plan assets. Utilization of expense reimbursement accounts (ERAs) has significantly increased from only 11% in 2011 and 43% in 2012, Cammack says. Seven in 10 respondents are using ERAs to pay advisers/consultants, 56% to pay auditor fees, and 47% allocate the account back to participants. The respondents who said their expense reimbursement account is allocated back to their participants has increased from 28% in 2012.

Vendor consolidation is another key trend evidenced by the survey; 92% of respondents now utilize three or fewer vendors for their 403(b) plans, with 42% using only one vendor. Vendor consolidation facilitates administration and compliance with current regulations, can make for a better participant experience and simplifies the employee communication process, Cammack says.

Eighty-seven percent of respondents outsource loan transactions to their vendors, while 78% outsource hardship withdrawal processing. Sixty-two percent outsource qualified domestic relations orders (QDROs), and 54% outsource non-hardship withdrawals. More than one-third (36%) outsource enrollment.

Higher education plan sponsors are also streamlining investment lineups, as 65% of plans offer 50 or fewer fund options. This is up from 62% in 2012. There has been an even greater movement away from vendor proprietary funds to more of an open-architecture platform, with only 54% of respondents reporting a proprietary model, down from more than two-thirds in the 2012 survey. More than 90% of respondents offer target-date funds in their retirement plan investment lineups.

Respondents are increasingly focused on fiduciary oversight. Plans with fiduciary committees continue to increase, from 85% of respondents in 2012 to 88% in 2013-2014. Sixty-three percent of these respondents said their committee meets on a quarterly basis. However, investment policy statements (IPS) are utilized by only 60% of fiduciary committees.

The use of consultants and advisers has almost tripled since 2010, with 90% of respondents utilizing some type of adviser, up from 77% last year and 55% in 2010. An increasing number of advisers are serving as plan fiduciaries, up from only one-quarter of advisers in 2010 to nearly half in 2013-2014.

The survey also found 457(b) plans continue to increase in number, with 46% of respondents offering them in 2013-2014, as compared to 38% in 2012 and 20% in 2010. Higher education institutions are wanting to meet the retirement needs of executives and senior administrators, Volo says.

Room for Improvement

The survey uncovered several areas in which plans can be further optimized. The use of automated plan features continues to rise, but only 22% have, or plan to have, an automatic enrollment provision. Of those, only 36% have incorporated automatic escalation. According to Volo, it could be a challenge to use auto-enrollment for some institutions due to state law prohibiting the reduction in employee wages without permission, but he contends institutions are slow to implement auto-enrollment mostly because they offer healthy base/core employer contributions. “We’ve been talking to clients, though, so we think we’ll see the use of auto enrollment and automatic deferral escalation increase,” he says.

This core contribution may also be why more institutions are not offering matching contributions on employee deferrals. Fifty-four percent offer an employer matching contribution, while 46% offer no match. Volo says the average base/core contribution provided by institutions in the survey is 6.8%, but some offer tiered core contributions depending on age or years of service, and 61% have tiered contributions of 11% of salary or greater. Among institutions that do provide matching contributions, the most popular formula is 100% up to 5% of salary deferred.

The high core contributions provided by higher education employers may also explain the average voluntary plan participation rate of between 41% and 50%. Cammack says plan sponsors are increasingly looking for ways to encourage more employees to make voluntary contributions. Volo says some have been reconsidering their plan design and changing at least part of the core contribution to a matching contribution. However, there are some political issues involved—some vocal employees may object—so plan sponsors have been cautious about such a change, he adds.

Thirty-seven percent of survey respondents still do not limit the number of loans a participant may have outstanding. “We do find that many plan sponsors now are introducing loan policies, so the plan is not used as an ATM or Christmas club,” Volo notes.

Also, 61% of respondents said their plan does not contain a cash-out provision for small plan balances. According to Cammack, an automatic cash-out provision can be useful in increasing the purchasing power of a plan by increasing the average account balance. It also facilitates compliance by minimizing “lost” participants with undeliverable addresses.

Looking Ahead

Eighty-four percent of respondents said a key initiative in the upcoming year will be to improve employee education. However, many plan sponsors already offer on-site meetings with educational representatives, with 32% saying a representative is available monthly. In the higher education space, top providers typically provide onsite education for employees, which could include guidance or advice. “In some ways, 403(b)s are behind 401(k)s, though they have caught up in many ways, but as far as on site advice, they are ahead of the game,” Volo says. “They realize this is the best way to connect with participants.”

Other key initiatives for the upcoming year cited by respondents included changing the number of investment options in their plans (42%), creating an IPS (33%), and establishing a fiduciary due diligence process (24%).

“The survey is a great way [for higher education plan sponsors] to know what their peers are doing, and hopefully they will continue to adopt best practices, streamline administration, increase employee engagement and get best value for retirement plan,” Volo concludes. “It can spur conversations about what plan sponsors can and should do.”

Volo says Cammack only provides the complete survey results with survey participants, but it can discuss some results with others.