Many academicand non-profit employers are trying to address the needs of thepresent employment marketplace with a retirement platform that isrooted in the past. (Photo: Shutterstock)

Recent news articles have noted that several colleges arejoining forces to pool their employee retirement accounts andlower administrative costs.

This trend reflects a simple fact: Academic and non-profitinstitutions, like all employers today, are facing workplacepressures due to rising costs, disruptive technology, and the needsof a new generation of employees. To attract and retain talent inthis environment, institutions must offer the most attractive benefits programs – withoutstraining their administrative or financial resources.

Yet, many non-profit employers are trying to address the needsof the present employment marketplace with a retirement platform that is rooted in the past:the individual annuity contract (IAC). Over the past severaldecades, millions of academic and non-profit institution employeeshave participated in 403(b) plans based on IACs.

Key disadvantages of IACs

Probably due to a lack of understanding of their current plans'deficiencies and available alternatives, most schools andnon-profits are continuing to still offer outdated IAC legacyplans. Such plans have several disadvantages versus newer groupplatforms:

Fiduciary risk – Most IAC plans were createdover 10 years ago, before current fiduciary regulations were inforce. Under ERISA, plan fiduciaries can be held personally liablefor high cost or inappropriate investments in their organization'sretirement plans. This fiduciary liability can be addressed bydelegating full fiduciary responsibility to a Registered InvestmentAdvisor (RIA) who is an ERISA 3(38) fiduciary or by jointly sharingfiduciary responsibility with an investment professional who is a3(21) fiduciary.

Excessive costs – Depending on the investmentshare class used in the plan, a large majority of IAC plans haveseparate account fees ranging from as low as 0.75% to as high as1.40% of participant account balances. New fiduciary regulationsrequire employers to ensure that participants' costs arereasonable. One way to get there: shift to an open architectureplatform that can reduce fees to 0.30%-0.40%, and enable employersto engage more robust support services.

Administrative burdens – Each IAC planparticipant has an individual account requiring a signedapplication, which increases HR's workload. Also, many of the IACplatforms typically have duplicate plans – one for participantcontributions and another for employer contributions. This leads todual Form 5500 filings and audits, and increases employer workloadand costs.

Limited support and service – IACs generally donot have a high level of service support, particularly for planswith under $10 million in assets. Employers are often “on theirown,” with limited assistance for plan design, enrollments,distribution of required notices, and other functions.

Few investment options – IACs limit theemployee's investment options to those preselected by the insurancecompany offering the plan. These limited options typically includeilliquid fixed accounts with locked-in distribution periods, heavyuse of proprietary funds, and target date/allocation funds that arestatic. This prevents employees from allocating their assets in adiversified manner that aligns with their risk tolerance.

Limited education and investment advisorysupport – Many IAC retirement plans don't offer sufficientplan education or individual investment advisory support. Alongwith more investment choices, today's employees deserve better planeducation and individual investment advice.

Modifying legacy plans – or transitioning to openarchitecture

Fortunately, there are ways to upgrade legacy plans to meetcurrent regulatory, sponsor and participant needs. An institutionmay be able to keep its IAC plan, while working with a qualifiedinvestment advisor to update the plan to align with today's bestpractices, regulations and employer/employee needs, while alsooffering better employee education options.

It is wise to choose an advisor who is an ERISA 3(21)co-fiduciary advisor or preferably an ERISA 3(38) full fiduciary,and will therefore be able to provide additional fiduciaryprotection. This will not solve the central fiduciary issueof participants paying excessive fees.

Some plan sponsors are not content to give their IAC plan a“tune-up,” but want to trade in their plan for one that iscompetitive with the benefits offered by for-profit companies andlarger not-for-profit organizations.

For such sponsors, an open architecture platform offers diverseinvestments, potentially lower costs, enhanced service support, andgreater fiduciary protection. There are two routes thatinstitutions can take to migrate to an open architecture plan:

1. Upgrade with your current provider.

Your institution may consider moving from an IAC plan to an openarchitecture platform with your current provider, if this option isavailable. For example, many academic and non-profit sponsors workwith TIAA, which offers an open architecture platform.

Besides offering participants a wider universe of investmentoptions, a switch to open architecture may provide otheradvantages:

• An overall reduction in plan costs.
• Employers are only paying for the services they receive and notsubsidizing other, less profitable plans to the provider.
• Underlying investment costs such as revenue sharing and brokercommissions are reduced because of a shift from retail pricing toinstitutional pricing.
• Simplified plan administration.
• As part of the process of working with a qualified advisor,upgrading to an open architecture platform would include havingonly one plan document and one Form 5500, which also contributes tocost savings.

Although a move to an open architecture platform can have manybenefits, this doesn't necessarily solve the key problem of theseIAC plans, which is that employees are not invested appropriately.They tend to chase returns, are not adequately diversified, andinvest either too aggressively or too conservatively.

A successful retirement plan should be measured by employeesatisfaction and outcomes, which is the result of employees meetingtheir retirement goals.

2. Move to an independent open architectureplatform.

An institution may prefer to move away from its current IACplatform and provider and adopt a new group retirement plandeveloped with the advice of an RIA. In addition to getting a freshperspective on employees' needs and investment options, thisapproach offers the following enhancements:

• Substantial investment and recordkeeping cost savings, comparedwith the costs of a typical insurance company-sponsored annuity orgroup platform.
• A higher level of operational and service support from adedicated representative versus a toll-free call center.
• The potential for a bundled approach allowing for a turnkey,streamlined administrative process as the sponsor may delegatethird party administration services to the record keeper.
• Additional ERISA 3(16) operational fiduciary protectionavailable via the plan administrator/custodian.

This is not to suggest that upgrading or transitioning anexisting IAC plan will be easy. However, the result clearly will beworth the effort – providing both employers and employees with amore robust, compliant solution that can deliver a wider range ofinvestment choices, potentially lower fees, better support service,enhanced education, and fiduciary protection.

Chris Schaefer, CFP, CPA/PFS, leads MVFinancial's Retirement Plan Practice, with over 10 years onthe MVFinancial team. He oversees all aspects of MVF's retirementplan management, where his duties include; developing proper plandesign, investment strategy and options, participant education andmanagement of client relationships. Chris is also a senior advisorat MVF, where he manages all aspects of his private clientrelationships. In both capacities, Chris works closely with thefirm's investment management, portfolio operations and clientservices divisions.

Chris is a key member of MV Financial's investment committee,participating in asset allocation and investment selectiondecisions as well as overall strategy formulation. His training anddistinctive skillset as a CPA and audit professional adds aninvaluable dimension to the financial advice he provides toclients.

Prior to joining MV Financial, Chris spent five years atPricewaterhouseCoopers LLP in the Audit and Assurance Servicesgroup. His specialization was in financial services, with specificexpertise in the banking and mortgage banking industries. Whilethere, he also gained experience in investment management, realestate, insurance, and pension plan strategies for large employerplans.

Chris holds a B.S. degree, cum laude, from Loyola University inMaryland, where he was a member of the Beta Alpha Psi (Accounting)and Beta Gamma Sigma (Business) honor societies. He obtained anExecutive Certificate in Financial Planning from GeorgetownUniversity in 2003.