Retirement Program – Frequently Asked Questions
The Chancellor recently announced enhancements to the NSHE Retirement Plan. This Frequently Asked Questions provides answers to some of the questions being posed now, and those received previously through interactions with the NSHE community during the review process.
What will not change?
These changes do not impact the PERS program. If you are enrolled in PERS, this change will not have any impact on your PERS account.
If you are participating in the supplemental retirement plan through the 457 deferred compensation program, this change will not impact that plan. You will continue to be able to use ING and Hartford/MassMutual for those plans.
In order to create a strong foundation for retirement security, NSHE provides various retirement programs to staff, depending upon position classification. The following Retirement Program components will continue to help NSHE employees save for their retirement:
- Defined Contribution Plan Alternative (RPA) – mandatory plan for faculty and staff
- Medical Resident/Postdoctoral Scholar Plan – mandatory plan for medical residents and postdoctoral scholars
- Tax Sheltered Annuity – voluntary supplemental plan for NSHE all employees
- Excess Benefit Plan – supplemental plan for those who can’t fully participate in the mandatory plans due to IRS limitations
- Public Employees Retirement System (PERS) for classified staff
- Nevada Public Employees’ Deferred Compensation Program (NDC) – voluntary supplemental plan for all employees of the State of Nevada, including NSHE employees.
The benefit level of NSHE’s Retirement Program is not changing. The System’s contribution rate to the Retirement Plan Alternative (RPA) will continue to be set by the Nevada legislature to match the PERS contribution rates. Currently, the contribution rates are 15.5% from NSHE and 15.5% from employees. Employees will continue to be immediately vested. In addition, the changes will not affect the PERS Program or the 457 Nevada Deferred Compensation Program.
Retirement Plan Changes
Most plans go out to bid every five years to ensure that a plan is getting the best available services at reasonable costs; but the last time that the NSHE plan went out for an RFP was in the 1990s. Although the Retirement Plan Advisory Committee (RPAC) met on a regular basis with the vendors to conduct plan reviews, these plan reviews were presented by the vendors themselves. In 2011, the RPAC was able to hire an independent consultant (AON/Hewitt Ennis Knupp) to assist the RPAC in conducting a comprehensive review of the plan both from an investment and administrative perspective.
This review resulted in the following:
- A review of the investment line up identified that majority of the funds offered through all three vendors were underperforming their benchmarks.
- Out of 287 funds offered to participants, majority of participants are invested in only about 10% of the funds.
- Fees could be negotiated even lower with the vendors if NSHE goes out to bid for administrative services.
- There has been a change in the marketplace that now allows plans to offer non-proprietary funds in the investment lineup; thereby separating the administrative functions from the investment.
- NSHE was paying retail prices for account services and investment management even though we have $1.9 billion in plan assets and over $100 million/year in contributions.
The RFP that went out requested pricing information from respondents on multiple scenarios including single vendor, multiple vendor with a master-recordkeeper, multiple vendors. After a review of the results, there was no added benefit in a multiple vendor or master-recordkeeper arrangement compared to a single vendor arrangement. In addition, vendors were charging less for a single vendor arrangement, as opposed to a multiple vendor or master-recordkeeper arrangement.
This change impacts the plans administered by NSHE including the Retirement Plan Alternative which is the mandatory plan for all faculty (those not enrolled in PERS), and the 403B supplemental retirement plan.
Specifically, the following components of the NSHE Retirement Plan are impacted by the enhancements:
- NSHE’s Retirement Plan Alternative 401(a) – the defined contribution mandatory retirement plan for faculty and administrative/professional staff, including the 415(m) Excess Benefit Plan.
- The Medical Resident / Post Doctoral Fellow 403(b) Program – the defined contribution mandatory retirement plan for Medical Residents and Postdoctoral Fellows.
- The voluntary tax sheltered annuity 403(b) program available to all NSHE employees
When you see the term “NSHE Retirement Plan,” or “the Plan,” it refers to the three aspects of NSHE retirement plan listed above.
These changes do not impact the PERS program. If you are on PERS, this change will not impact your PERS account.
If you are participating in the supplemental retirement plan under the 457 Nevada Deferred Compensation Program this change will not impact that plan. You will continue to be able to use ING and Hartford/MassMutual for those plans.
You can keep your existing assets with your current vendor and investments. However, contributions starting on January 1, 2014 will go to TIAA-CREF and to the new line up.
You will continue to have access to the funds offered by TIAA-CREF, Fidelity, or VALIC for your existing assets. However, you will need to make an investment election for your contributions to the plan beginning 1/1/2014.
You can elect to invest in the funds within the core lineup or you can elect to invest in other mutual funds through the Mutual Fund Window. Most proprietary funds offered by TIAA-CREF, Fidelity, and VALIC will be available in the Mutual Fund Window, however your fees may increase.
If you are investing in annuities (TIAA-CREF or VALIC), these funds are not available in either the core line up or the mutual fund window; however, it is likely that a near-equivalent mutual fund product will be available.
TIAA-CREF will be sending out transition guidelines to all employees at the beginning of November. These guidelines will contain information on the options available to you. In addition, financial consultants will be available on campus starting the week of November 11 to assist employees with questions and transactions. Additional information regarding times and locations will be available shortly.
Participants who elect to use the self-directed mutual fund window will not be charged an annual account service fee. However, some funds may have transaction fees or sales loads. You will have the option to search for funds that do not have transactions fees or loads. Lastly, it is important to note that participants can avoid these extra charges by utilizing the funds in the core investment lineup, many of which will have low, institutional expense ratios.
The Retirement Plan Advisory Committee is composed of representatives from each of the NSHE institutions appointed by the Chancellor after consultation with the President. The Committee also includes a representative of the Faculty Senate Chairs and a Retiree member.
The Committee serves in an advisory capacity to the Vice-Chancellor of Administration and Operations who is the authorized plan administrator for day-to-day operational retirement plan matters. The Committee reviews and makes recommendations to the Vice-Chancellor on past, current and proposed policies related to the NSHE Retirement Plan.
Fees & Expenses
Investment management and administrative service expenses have historically been paid from an internal charge against the assets invested in the Plans’ underlying investment options. These fees can vary greatly from fund to fund and therefore from participant to participant.
Total expense ratio breakdowns are available in the quarterly fund performance reports prepared by Hewitt EnnisKnupp.
The Committee feels strongly that all participants should share equitably in their administrative expenses, regardless of the funds in which they choose to investment. As a result, a uniform asset-based fee of roughly 0.07% ($0.70 per $1,000 of assets per year) will be assessed on all retirement accounts that are recordkept by TIAA-CREF (including both the new fund lineup and legacy TIAA-CREF assets) starting in the first quarter of 2014.
Although this fee may appear to be “new” because it will be visible on quarterly statements, it is actually lower than the administrative service expenses that have historically been paid by participants in the past.
In September of 2012, a benchmarking analysis of the Plans’ total costs by Hewitt EnnisKnupp determined that the average administrative fees paid by participants was 0.20% for Fidelity, 0.19% for TIAA-CREF, and 0.55% for VALIC (expressed as an annual percentage of total assets). In 2012, direct negotiations with Fidelity and TIAA-CREF reduced their specific administrative fees to 0.11%.
The RFP process and the resulting service provider consolidation to TIAA-CREF has resulted in significant reduction in these fees. Specifically, participant administrative and service fees are being reduced to 0.07%. The 0.07% fee includes a 0.04% contractual payment to TIAA-CREF for its services and up to 0.03% for NSHE administrative expenses, which includes payments to retain NSHE’s independent investment consultant.
The RPAC will regularly monitor the NSHE administrative expense budget, with the expectation that the percentage fee can be reduced as assets in the program grow.
If you choose to keep your assets invested with Fidelity or VALIC or in TIAA-CREF mutual funds, your investment management fees are not expected to change. However, if total NSHE asset levels drop below the minimums required by the providers to offer the existing lower-cost “Institutional” or “K” share class options, those funds could revert back to the “retail” share class offerings which would result in higher costs for those participants who remain invested in those funds.
If you choose to keep your assets invested in legacy CREF variable annuities, you will receive a quarterly credit for the administrative portion of the total expense ratio (currently 0.24% per year). However, these investments are subject to the new asset-based administrative fee of 0.07% per year as described above. The net result will be a reduction of the total fee by about 0.16%. For TIAA Traditional investors, the quarterly credit for the administrative portion of the total expense ratio is currently 0.15% which will be offset by the new asset-based administrative fee of 0.07%. The net result will be a reduction of the total fee by about 0.08%.
These pricing structures will apply to both legacy and new TIAA Traditional Annuity contracts that have not been annuitized. Legacy TIAA-CREF mutual funds are institutional share classes with no imbedded administrative fee; these will also be subject to the 0.07% 403(b) Tax Sheltered Annuity administrative charge.
The total fee, including investment management expense and the administrative services fee, affects the growth of a participant’s retirement account. In the past the investment management, administrative, and service fees were included in an investment options total expense ratio. The net fees for the new investment lineup will include only the investment management expenses, with a uniform asset-based administrative fee of roughly 0.07% ($0.70 per $1,000 of assets per year) assessed on all retirement accounts that are recordkept by TIAA-CREF (including both the new fund lineup and legacy TIAA-CREF assets).
The full disclosure of fees for the new tiered fund lineup is available at:
The fees are different for the RPA 401a plan versus the other plans only for the Vanguard Target Retirement Funds. For the 401(a) plan, NSHE was able to leverage the high expected asset levels to negotiate low investment management fees of 0.11% with Vanguard, specially using an investment vehicle known as a Collective Investment Trust. However, because of IRS regulations collective trusts are not supported on the 403(b) and 415(m) plans, so the mutual fund versions of the Vanguard Target Retirement Funds with investment management fees of 0.16%-0.18% are offered. The management and underlying investments are identical for the collective trusts and the mutual funds.
NSHE’S Strategic Review Process
In the summer of 2007, the Retirement Plan Advisory Committee (RPAC), which advises the Chancellor and his designated authority on matters of Retirement Program policy, began a long-term strategic project of evaluating our plans. This project was initiated for several major reasons:
- Legislative changes promulgated by the passing of IRS regulations in 2007 imposed new fiduciary duties on plan sponsors. This was the most sweeping piece of legislation passed with respect to 403(b) plans such as NSHE’s Tax Sheltered Annuity Plan since 1964.
- The goal to offer outstanding investment options, technology, administration, employee communications and investment education.
- A strong desire to offer more personalized and neutral retirement planning and investment education.
- Concerns about the expenses paid by plan participants.
- An overarching desire for NSHE to provide a world-class retirement plan solution to its employees.
NSHE elected to engage the services of a third party independent consultant to help manage the strategic review process. Working with an organization that knows and understands the many challenges and significant opportunities facing the higher education marketplace and who does not represent any particular investment company adds important perspective and expertise to the process.
Hewitt EnnisKnupp’s first assignment was to review the Retirement Program and compare it to industry best practices and identify potential areas of weakness and improvement. Their findings gave reason to believe that certain plan enhancements could be made to the Retirement Program that would benefit participants.
The RPAC’s multi-year evaluation process is described in greater detail in a document entitled, “Summary of Current Status, Goals & Objectives, and a Process for Achieving Enhancements” available on the NSHE Retirement Program website.
It is important to note that the Committee’s one and only interest is in the betterment of the Retirement Program for the benefit of participants.
Hewitt EnnisKnupp was chosen as the Plan’s Advisor by a committee selected by Vice Chancellor Patterson following an extensive Request for Qualifications (RFQ) process conducted in concert with the BCN Purchasing Office. The RFQ was delivered to 21 of the leaders in the investment management consulting market. The request was also advertised in the Reno Gazette and posted to the UNR website. Eleven proposals were submitted, evaluated and scored. Finalists were interviewed and scored based on capacity, experience, personnel, references, and pricing. The committee unanimously selected Hewitt EnnisKnupp.
Hewitt EnnisKnupp is a global consulting practice with more than 450 investment consulting clients in the United States and with about $4 trillion in assets under advisement globally. Their client mix includes a large number of public plans as well as plans for endowments, foundations and not-for profit entities.
While not everyone has the same investment objectives, knowledge, retirement time horizon, and tolerance for risk, improvements can be made to the Retirement Program to benefit all participants by:
- Simplifying the recordkeeping process to comply with Internal Revenue Service/Department of Labor requirements to ensure participants benefit from tax-deferral of contributions and earnings until benefits are distributed from the plan.
- Simplifying the investment process and encouraging participation by offering an improved investment menu with a wide variety of competitively priced options.
- Leveraging the value of NSHE’s combined retirement assets to lower administrative and investment management costs paid by plan participants. High administrative costs negatively impact participants’ investment earnings potential. One of the Committee’s goals is to ensure plan participants pay competitive fees for the investments and services provided.
- Providing unbiased, independent investment guidance and advice.
The review also concluded that NSHE could benefit from some plan enhancements by strengthening its role as plan sponsor and fiduciary.
In the following sections of this FAQ, you will find more details on the benefits of the above plan improvements.
This process commenced in earnest 2 years ago leading first to the RFQ process for the investment management consultant and now to a recommendation for a recordkeeper selection process. The Committee anticipates that it will take roughly two months to develop a thorough Request for Proposals (RFP) and several more months to evaluate the responses, interview those selected as finalists, and possibly several more months to negotiate a comprehensive contractual arrangement, Implementation of any new arrangements is planned for January 1, 2014.
If the new arrangement results in a fee savings of 8 basis points (0.08 %) on the total balances held in the Plan, that will equate to an overall savings of well over $1,000,000 in aggregate per year to participants in the Plan. Therefore any additional delay in implementation will result in lost savings to Plan participants of over $100,000 per month. While the Committee agrees that due diligence is appropriate, delay for its own sake benefits no one.
Not necessarily. The RPAC is not predisposed to any particular administrative service provider structure. For example, NSHE may continue to offer three administrative service providers, consolidate to one or two administrative service providers, or establish a hybrid structure utilizing a “master administrator.” The RPAC will explore whether there are advantages to simplifying the administrative service provider structure for contributions in 2014 and later years, based on soliciting bids from various service providers using a Request for Proposal (RFP) process, as it represents the best method to understand the service options and fees available in the marketplace today.
In making this decision, the RPAC will focus on the purpose of the Retirement Program, which is to provide employees the opportunity to accumulate a reasonable level of savings towards retirement income. The goal is to allow employees to prudently maximize their retirement income.
Although the plan consultant has advised the RPAC that a single administrative service provider structure is the current best practice design from a “clean slate” approach, an existing plan like NSHE’s with a large base of legacy assets needs to consider the best interests of all participants. The RPAC will not make a decision as to whether to recommend any particular administrative service provider structure until it has thoroughly reviewed the responses made by the firms participating in the RFP process.
Peer institutions that have recently gone through a similar RFP process have reached different conclusions regarding the administrative service provider structure based on the peculiarities of their plans. However, the Committee believes it is important to formally place future contributions on the negotiating table in order to induce the RFP participants to make their best offers for service enhancements and pricing.
A Request for Proposal (RFP) process is used to survey the marketplace and find the administrative service provider offering the best fit for NSHE. An RFP will be prepared and distributed to the Retirement Program’s three current administrative service providers (Fidelity, TIAA-CREF, and VALIC), as well as other companies that are prominent in the 403(b)/401(a) marketplace.
The RFP will contain an extensive list of questions on topics such as client service, monitoring and reporting, service capabilities, technology offerings, investment flexibility, fees, investment tools and services, communication programs, quality standards, etc.
The responses will be reviewed and scored by the RPAC with the help of our consultant. The RPAC will review the scores and discuss any critical issues that have been identified. Based on the scores and discussion surrounding these critical issues, the RPAC will select two or three firms as finalists. The finalists will be required to answer any outstanding questions and explain why they should be selected.
After the finalist presentations, the RPAC will deliberate and recommend the administrative service provider(s) and investment funds that best meet the goals discussed above. That recommendation is subject to the final approval by the Chancellor.
If one or more of the Retirement Program’s current administrative service providers is not selected as a result of the RFP process, participants may continue to keep their existing assets invested with that administrative service provider. These will remain unaffected by an administrative service provider change. Only future contributions will be required to go to the new administrative service provider(s) selected through the RFP process.
Beginning with the new administrative service provider structure, sometime after January 1, 2014, all future contributions will need to be made within the Retirement Program’s redesigned investment menu. Assets invested in a fund that is no longer offered for future contributions can be transferred to other funds made available by the on-going administrative service provider(s) or you may decide to keep existing funds invested as they are. The RPAC anticipates that many participants will find the new investment menu and lower expenses sufficiently favorable that you will opt to transfer your past accumulations into the new investment structure.
While the Retirement Program’s new investment structure may no longer accommodate future contributions to an existing investment fund after January 1, 2014, existing assets will remain unaffected by a change in administrative service provider or a redesigned investment menu. For new contributions, the investment menu will continue to offer a sufficient range of choice to allow participants to form well-diversified portfolios. Most or all of the mutual funds offered by the current administrative service providers will be available on the redesigned investment menu or through the self-directed mutual fund window. Since annuities are proprietary investment products offered by insurance companies, they will not be available through the mutual fund window. However, it is likely that a near-equivalent mutual fund product will be available. In addition, if a master administrator structure is chosen through the RFP process, it is likely that a select number of annuities will continue to be available on the redesigned investment menu.
To help participants learn more about the new investment menu, there will be a comprehensive education and communication campaign in a variety of mediums to introduce all the benefits of the new program to participants as well as to provide further detail on the investment menu. For example, there will be numerous onsite seminars and meetings at all campuses to provide education as well as written communications and a web portal. Internet tools will also be available to help participants review investment funds and plan enhancements.
Simplified Investment Process
With roughly 300 funds available, it is extraordinarily difficult for the RPAC to review the performance of all the funds, and replace underperforming funds as necessary; in addition, participants have difficulty understanding all the investment choices.
While additional fund choices may be perceived as a benefit, numerous researchers have concluded that more fund alternatives typically lead to confusion and adverse portfolio choices among participants.
More importantly, evidence has shown that these extra choices do not help participants form better portfolios or save for retirement. Decreasing the number of investment funds will simplify administration, improve investment quality, and lower fees.
Yes and no. The tiered investment structure proposed by the RPAC will have a limited number (15-25) of diversified “core” investment funds that will be monitored for their continued viability and integrity. However, there will also be a self directed mutual fund window that gives participants access to a universe of thousands of mutual funds from hundreds of mutual fund companies.
This feature will appeal to those participants who want the flexibility to invest outside of the “core” line-up of funds. The core “best in class” funds will be selected in an “open “architecture” environment. Open architecture refers to NSHE’s ability to choose from the entire universe of options when deciding on its list of investment funds — not just those provided by the administrative service provider.
Currently, the Retirement Program has roughly 300 investment funds among the three administrative service providers. There are three main reasons to reduce the number of funds in the plans:
- Research has shown that excessive choice in a retirement plan causes many participants to make adverse portfolio choices or postpone decision making regarding their investments.
- By consolidating contributions into fewer funds with less redundancy, NSHE can increase its purchasing power and obtain institutional pricing with lower overall expense ratios for the collective benefit of all participants.
- With hundreds of funds in the plan, the RPAC has difficulty fulfilling its fiduciary responsibilities. Non-compliance can result in serious adverse consequences for all participants.
Streamlining the investment menu to reduce the number of funds with overlapping investment styles will reduce confusion in the fund selection process for participants. In addition, decreasing the number of investment funds will allow for more effective communication and monitoring of the individual investment options.
A tiered investment structure packages or categorizes investment funds in a manner that guides participants through the investment decision-making process. Participants first select a path that is appropriate for them given their:
- Investment knowledge
- Time for managing their own investment portfolios
- Tolerance for risk
- Interest in making asset allocation decisions and selecting investment options
The tier’s investment options and participant education materials are then tailored to meet participants’ needs. For example, a disinterested investor who lacks the time for managing their own investment portfolios or a novice investor who is uncomfortable making asset allocation decisions and selecting funds will typically select Tier I because the communication materials will guide them to this decision. The communication materials will then assist the novice investor in selecting the appropriate pre-mixed asset allocation fund based primarily on their time horizon and/or risk tolerance.
The tiered investment structure provides participants with a broad range of distinctive investment options, but not so many that, when faced with choices, participants have a difficult time structuring an investment portfolio. Moreover, by limiting the number of choices available to employees in the “core” line-up of funds, NSHE will be better able to monitor the funds offered to participants to ensure their continued viability and integrity, increasing the likelihood that employees will earn better long-term performance.
Yes, NSHE recognizes the importance of providing lifetime income solutions to participants and will continue to offer a capital preservation investment option with guaranteed rates for future investing. As part of the RPAC’s selection process, factors such as asset management, performance, risk, liquidity, fees, and annuitization flexibility will be evaluated.
Participants who elect to use the self-directed mutual fund window will not charged an annual account service fee. However, some funds may have transaction fees or sales loads. You will have the option to search for funds that do not have transactions fees or loads. However, it is important to remember that participants can avoid these extra charges by utilizing the funds in the core investment lineup, many of which will have low, institutional expense ratios.
Yes, many of the funds in the current investment lineup are underperforming. Under the Retirement Program’s “bundled” investment structure, investment funds are confined to the proprietary offerings of our three administrative service providers. Only proprietary investment options from Fidelity and TIAA-CREF are currently offered in their plans; VALIC offers their own annuities and select mutual funds with which they have sales agreements As a result, many “best-in-class” or nationally recognized funds are not available to NSHE employees.
One of the best ways NSHE can ensure that participants have access to low cost, top performing investment alternatives is by moving away from the bundled investment structure to an “open architecture” investment environment. Open investment architecture refers to the Program’s ability to choose from the entire universe of mutual funds when deciding on its list of investments – not just those provided by the administrative service provider. Over the past few years, the service providers have improved their technology and are now able to handle funds from other managers in an open architecture structure.
As of 12/31/11, 18.9% or $328,590,722 of the Plans assets were invested in funds that underperformed their respective market benchmarks over the trailing one-, three-, five-, and ten-year time periods. That number is significantly larger when looking at shorter time periods. For example, 40.4% or $700,496,432 of the Plans assets were invested in funds that underperformed their respective market benchmarks over the trailing one- and three-year time periods while 53.9% or $936,235,148 of the Plans assets were invested in funds that underperformed their respective market benchmarks over the trailing one-year time period.
The most important measure of an investment fund’s performance is the comparison of returns against a market benchmark. For performance evaluation, both broad market indices (i.e., Dow Jones U.S. Total Stock Market Index) and style-specific benchmarks (i.e., Russell 1000 Growth Index) were used that adequately represent a fund’s investment universe. For example, the S&P 500 is used as a benchmark against which performance of large-cap or “blue chip” managers is compared.
The factors considered in determining the best benchmark for each of the Retirement Program’s funds include the manager’s opportunity set, Beta, R2, correlation, and historic portfolio composition. The benchmarks were also reviewed with the managers to garner mutual agreement before establishing the benchmark.
This type of benchmark has all of the characteristics of a good benchmark – it can be agreed upon and specified in advance, its composition is known to the manager and reflects securities upon which the manager has an opinion, and it is investable – one can invest in a market index through an index fund.
The Retirement Plan Advisory Committee will utilize the rigorous manager research process identified in Retirement Program’s Investment Policy Statement to identify “best in class” funds with strong investment processes, reasonable risk, and low fees. The Investment Policy Statement can be found at the NSHE Retirement Program web site.
Reduced Plan Costs
Yes. In the current “bundled” administration arrangement, administration and investment management expenses are paid from an internal charge against assets invested in the Retirement Program’s underlying funds. This creates an environment that is confusing and handicaps NSHE from acting prudently to defray unreasonable administrative expenses.
How much a participant pays for administrative recordkeeping is currently dependent on the size of their retirement accumulations and on the particular investment funds in which they have chosen to invest given that a portion of each fund’s expense ratio goes back to the administrative service provider as “revenue sharing” to pay for account administration and participant services.
The “average” participant in the NSHE Retirement Program with $121,000 in assets pays $680 per year in total fees, of which $410 is for investment management costs and $270 is for administrative expenses. Industry benchmarking of peer institutions with plan assets as large as NSHE’s indicates that these costs should be significantly lower.
The RPAC recognizes that many of these costs are in place to support an inefficient system that is based on a retail model of gathering assets. Soliciting bids from various service providers using a Request for Proposal (RFP) process (last done in the 1990s) represents the best method to significantly lower costs to participants.
It is also important to note that participants with large retirement accumulations are currently paying the most for administration recordkeeping. And because the price is asset-based, as the participant’s account balance goes up, his or her fees go up — even though the level of service remains the same. In addition, the payment of administration fees is not equitable among participants because of variability in revenue-sharing arrangements.
For example, the administrative expenses for participants invest solely in the Fidelity Spartan index funds, which have zero formal revenue sharing, are being subsidized by participants who invest in funds that do provide revenue sharing to the administrative service provider. By using institutional funds with no revenue sharing in a future core investment lineup, the administrative expenses can be charged separately and more equitably among all participants
The fee transparency table on the NSHE website illustrates the breakdown between the investment management and administrative expenses for each of the roughly 300 investment alternatives currently available in the Retirement Program.
Yes, administrative and investment management fees are taken before earnings are credited to participants’ accounts, thereby reducing the return on their investments. Reducing administrative and investment management fees will allow more retirement earnings to accumulate for participants.
Even small differences in fees can translate into large differences over time. For example, if a participant invests $10,000 in an investment option that produces an 8% annual rate of return before expenses and has annual operating expenses of 1.5%, then after 20 years the participant would have roughly $35,236. However, if the investment option has expenses of only 0.5%, then the participant would end up with $42,479 – a 21% difference.
“Unbundling” or decoupling the administrative recordkeeping from the investment management of the Retirement Program will provide NSHE with greater transparency and the best opportunity to negotiate on behalf of participants to reduce fees as total costs = administrative recordkeeping costs + investment management costs.
The Plans’ high administrative recordkeeping fees will be addressed by soliciting bids from various administrative service providers. As discussed earlier, a Request for Proposal (RFP) will be sent to the Retirement Program’s three current administrative service providers (Fidelity, TIAA-CREF, and VALIC), as well as other companies that are prominent in the 403(b)/401(a) marketplace, as it represents the best method to understand the service options and fees available in the marketplace today.
Investment management fees will be addressed by utilizing open architecture to offer participants a better range and quality investment solutions and by consolidating ongoing contributions into fewer funds with less redundancy to increase its purchasing power and obtain institutional pricing with lower overall expense ratios for the collective benefit of all participants.
As an example, many participants are currently paying roughly 0.45% for an S&P 500 Index Fund offered through the Retirement Program’s existing administrative service providers. This same S&P 500 Index fund could be made available for 0.04% by leveraging the Retirement Program’s total assets and incorporating institutional share classes of mutual funds.
Yes. As noted earlier, participants with higher average balances are subsidizing lower balance participants’ cost to participate in the plans because of variability in revenue-sharing arrangements. And because the price is asset-based, as the participant’s account balance goes up, his or her fees go up — even though the level of service remains the same.
Moving to an explicit, hard dollar administrative fee and incorporating institutional share classes of mutual funds will have merits beyond simple fee transparency. Structuring the Retirement Program so that each participant pays a fixed amount for administrative recordkeeping on will be more equitable. And, experience has shown that the fee transparency gained through an “unbundled” administrative recordkeeping solution, with little or no revenue sharing, will result in meaningful participant fee savings.
Clear, Effective Participant Communication
Research has shown that participant communications are negatively impacted in a multi-administrative service provider structure as any education that occurs is usually a by-product of a sales pitch from provider’s competing for participant accounts. An administrative configuration that eliminates ambiguity for participants and focuses on a consistent effort of employee engagement and active planning is ideal. A consolidated administrative service provider structure does just that.
It is noteworthy that the perception of many plan sponsors is that it is better to continue with a multi-vendor approach because participants/employees will become upset if their vendor is eliminated. The experience of several of our peer institutions and the Retirement Program’s consultant is that a best-in-class investment line-up, complemented with clear education and planning tools, and a competitive fee arrangement typically mitigates or eliminates the majority of these concerns.
NSHE’s Fiduciary Considerations
Governance is the process by which a retirement plan sponsor discharges it legal obligations. Good governance, including the structure and operation of plan committees, will reduce the risk of legal liability, ensure accountability, promote efficiency, improve or maintain the quality of the Plans, and increase the security of the Plans’ promises.
In evaluating the prudence of actions taken by plan fiduciaries, courts have looked to the “process” that was undertaken in deciding to take such actions. As a general matter, courts have found that there is no fiduciary breach when the process was adequate. While NSHE is technically exempt from some of the regulations governed under the Employee Retirement Income Security Act (ERISA), including fiduciary responsibilities, best practice implies that the System should follow them.
The Retirement Program’s fiduciaries, the RPAC, are responsible for selecting investment providers and the investment funds, and for monitoring their performance. Accordingly, while many plans similar to NSHE’s continue to offer hundreds of investment funds, this structure no longer remains a prudent strategy from a fiduciary practice. By limiting the number of choices available to employees, NSHE will be better able to monitor the funds selected to ensure their continued viability and integrity, increasing the likelihood that employees will earn better long-term performance.
Communication within the NSHE Community
General questions can be submitted via email to:
Participants may also contact any of the members on the RPAC Membership Roster
Request for Proposals Process
The RFP process will begin after all input has been gathered from the NSHE community. The employee meetings and planned participant survey scheduled for the Fall of 2012 will provide further input for the design of a RFP.
The RFP will be used to evaluate several different scenarios for the future of the Retirement Program through the competitive bid process. Depending on the input from the various stakeholder groups and further analysis by the RPAC, the scenarios will likely range from the unbundled, single administrative service provider structure with open-architecture to the existing fully bundled structure with up to three administrative service providers.
The Committee is also investigating a hybrid structure that utilizes a “master administrator and has been employed by many peer institutions. The large base of existing participant assets as well as proposals received for various scenarios will all be taken into account in determining the optimal structure for participants going forward.
The entire RFP process will be guided by the input received from participants and the Goals and Objectives established in Exhibit E of the Summary of Current Status, Goals & Objectives, and a Process for Achieving Enhancements available on the NSHE Retirement Program web site.
More importantly, it is the fiduciary duty of the Committee, the investment consultant, and the Chancellor to act in the best interests of the participants when making their recommendations and/or decisions.