Staying Ahead of the Curve: Saving Money by Auditing Your 457 Plan

Transcription

1 Staying Ahead of the Curve: Saving Money by Auditing Your 457 Plan Michael P. Beczkowski, AIF, AIFA (Office) (Cell)

2 Retirement Readiness State pensions not likely to provide adequate retirement Never designed to provide 100% of salary at retirement Social Security questionable in amounts Cost of living outpacing income Medical Costs Declining standard of living Consumer debt 2

3 Rising Cost Of An Aging Workforce Baby Boomers getting ready to retire Largest section of current workforce Age wave Unprepared aging workforce Work past normal retirement age Highest cost employees stay on payroll Most don t want to be there but cannot retire Decline in productivity 3

4 Rediscovering Your 457(b) Plan 457(b) Plans are an important tool to assist employees to save for retirement Unfortunately, there are over 10, (b) plans nationally without any governance Results in poor outcomes for both participants & plan sponsors 4

5 What Is A Governance Process? Plan governance is the administrative oversight that helps ensure you are managing an effective and compliant plan. It s the basis for making decisions regarding the plan. There should also be clear delegation of duties and documentation to maximize its effectiveness. This includes reviewing plan documents, investments and fees within the plan. Source: TIAA-CREF-Plan Governance Toolkit 5

6 Ungoverned Plans Are Plagued By: High program and investment management fees Overwhelming list of investment options Lack of fee transparency Multiple number of providers Older platforms (limited number of options) No contract optimization (termination penalties) Inefficient use of revenue sharing No formal processes or documentation 6

7 Responsibilities Of Plan Fiduciaries To act solely in the interest of plan participants and their beneficiaries; Carry out their duties with skill, prudence, and diligence; Follow the plan documents; Diversify plan investments; Pay only reasonable expenses of administering the plan and investing its assets; and Avoid conflicts of interest. Fiduciaries that do not follow the required standards of conduct may be personally liable. If the plan lost money because of a breach of their duties, fiduciaries would have to restore those losses, or any profits received through their improper actions. U.S. Department of Labor Source: 7

8 State Laws Govern Non- ERISA Plans At least 31 states have adopted fiduciary standards similar to ERISA prudent man standard At least 15 states use the ERISA standard word for word 8

9 Other Sources Of Governance Certain federal laws (e.q. SBJPA 96) requires 457(b) plans assets to be held in a trust account Parts of ERISA (e.q. 415 limits) Municipal laws and ordinance Courts: May look at ERISA for guidance 1 1 Board of Trustees of Employees Retirement Plan of City of Baltimore v. Mayor and City Council of Baltimore. Source: Montgomery Retirement Plan Advisors 9

10 Defining Your Plan Plan Sponsors should define the purpose of their 457(b) plan and how engaged they want to be: A payroll slot or A real tool and benefit for participants 10

11 Plan Statistics Total assets of approximately $9 million The Plan Demographics and Assumptions Included: 480 employees that work 20 hours or more that are eligible participants 150 actively contributing participants 222 participants with a balance 21 active loans with a loan balance of $148, Average account balance = $40,171 Median account balance = $12,750 11

12 Why The Study? Plan had never been evaluated Last price reduction for participants was in 1999 Plan Sponsor was concerned about fees due to an employee complaint 12

13 Plan Fees Two main fees are the primary areas of focus: 1. Program fees 2. Investment management fees (various funds) Fees are bundled together and not explicitly shown 13

14 Breakdown Of Fees Recordkeeping Fees (1.03%) Administration Education Services 14

15 Price Comparison Vendor Vendor A Vendor B Vendor C Vendor D Vendor E Average Current Vendor Difference (Average and current) Professional Fee Schedule Required Revenue Quote 17 bps 33 bps 41 bps 23 bps 35 bps 30 bps 103 bps 73 bps 15

16 Potential Cost Savings The difference between the current pricing structure and the average quote (73 basis points) would save participants approximately $64,800 in year one The savings will increase annually as plan assets grow 16

17 Assuming an 8% return, 73 basis points (0.73%) will result in a 30 year opportunity cost of: Annual Contribution 30 year opportunity cost $600 ($9,576) $3,000 ($47,880) $10,000 ($159,597) $18,000 ($287,275) 17

18 Decision Points: Negotiate with current vendor Rebid the plan on the market place 18

19 Results Of The RFP Significantly reduced fees by 60% and enhanced fee transparency Implemented a focused lineup of investment options Improved frequency of on-site participant meetings and communications Committee meets regularly to measure and document progress Overall retirement readiness improved significantly 19

20 Conclusion 457(b) Plans can be a valuable tool for retirement State plans may not be enough Most 457(b) plans are ungoverned: poor outcomes Vendor fees costs have been reduced significantly Participants can take advantage of additional beneficial products offered now such as Target Date Funds and managed account services. These products can promote savings in a helpful and straight forward way. Periodically reviewing program fees can enhance participant nest eggs 20