Dana Blydenburgh and Steve Gordon

Nuts & Bolts of Defined Contribution Plans:
Investing and Other Fiduciary Responsibilities
Dana Blydenburgh
Steve Gordon
Governmental Defined Contribution Plans
401(a) Defined
Contribution
• A retirement savings plan that allows dollars to accumulate on a tax-advantaged basis
for retirement
• Contributions made by the employer, the participant, or both
• Employees typically select their investments from a menu designed by the employer
and/or an advisor
457(b) Deferred
Compensation
• A supplemental program that allows participants to make contributions on a pre-tax
basis
• Taxes are deferred until your assets are withdrawn, usually during retirement
• Employees typically select their investments from a menu designed by the employer
and/or an advisor
What type of plans do you offer?
401(a) Defined
Contribution
•All Industries
•Governmental and Public Works
5.0%
49.3%
457 Deferred
Compensation
•All Industries
•Governmental and Public Works
9.2%
76.0%
DB Plan
•All Industries
•Governmental and Public Works
PLANSPONSOR DC Survey, 2013
44.1% 7.6% (Soft Freeze)
72.7% 2.7% (Soft Freeze)
Evolving Role of DC Plans in Public Sector
Research conducted by Paula Sanford, Ph.D. and Joshua Franzel, Ph.D.
Current Environment
• 90% of state and local government employees
have access to retirement benefits
• 84% have access to a defined benefit plan with
78% participating
• 30% have access to a defined contribution plan
with 17% participating
• About 1/3 do not participate in Social Security
Perspective: Director of HR and Benefits
New Director HR Benefits for Sandy Beach
You
What are my DC plan responsibilities?
A Plan Fiduciary as anyone who: .
• Exercises authority or control over the management
or administration of the Plan
• Exercises ANY authority or control over Plan assets
Can you authorize a fund change?
Can you authorize distributions?
Can you negotiate with a vendor?
Could you seek to hire/fire vendors?
Am I REALLY a fiduciary?!
“I’ve been told I have immunity” .
• Do you understand FL statutory and other applicable
laws that define your responsibilities?
• Do you understand the “caveats” in any potential
immunity protections?
• Are you protected if the Plan participants or the
State Attorney General sues you?
• Will immunity be provided if the issue becomes a
“public scandal”?
Fiduciary (and moral) responsibilities
Paternalistic
Moral obligation to help
employees retire with
dignity vs. simply
attracting and retaining
employees at the most
efficient price.
Legal and Regulatory
FS § 112.656(1)
Carry out their duties
prudently
Select and monitor plan
investments
Pay only reasonable plan
expenses
History of government DC plan vendors
CITY HALL
The danger in being Hiroo Onoda
Unequal attention
Percentage of Total Participants
100%
80%
60%
Consultant expertise
Educated Trustees
Defined responsibilities
Competition among
providers
 Transparent pricing




Defined
Benefit
40%
Defined
Contribution
20%
0%
1977
1982
1987
1992
 No one was watching
 No one knew they were
responsible
 Limited providers
 High fees, difficult to
understand
 No consultants
1997
2002
2007
2012
Go home and do this now!
Set up Governance
• Don’t take the risk alone
• Who should make decisions?
• Who should be included?
• How will you communicate?
How do I get started? Checklist:
• Locate your plan documents
• Check local ordinances - who has responsibility?
• Understand your fees
– You will need help!
– Don’t make decisions without a Committee
• Understand your fund menu
–
–
–
–
How did the current lineup get picked?
How is it monitored?
Do you understand your most conservative “fixed” option?
You will need help!
Benchmarking your plan
Retirement
System
Plan level
Participant
Level
Understanding how to advance the conversation
DB
457(b)
401(a)
DROP
Your plans are NOT
mutually exclusive!
Fees
Fees
Fees
$120,000 annual fees
(12 basis points)
Limited Architecture
$150,000 annual fees
(15 basis points)
Open Architecture
Where are vendors earning money?
Extra cost = working longer
The real cost of paying too much in fees!
What an extra 1% in fees cost you in the long run...
$1,800,000.00
Saving Phase
Retirement
$1,600,000.00
Extra savings:
$500,000
$1,400,000.00
Account Balance
$1,200,000.00
$1,000,000.00
$800,000.00
$600,000.00
$400,000.00
$200,000.00
$0.00
25
30
35
40
45
50
55
60
65
70
75
80
85
90
Participant Age
Extra spending:
10+ years
Cost of provider conflicts of interest
Universe of
Funds
Systematic
Limitations
Revenue
Arrangement
with Provider
Marketability
Suitability for
Participants
Profitability
Influences
Available
Fund
Options
Cost of provider conflicts of interest
Key Questions to ask:
• Am I paying for these services in basis points vs. flat fee?
• Is the same provider offering any of the above services?
• Is there a potential benefit to the provider depending on which
funds my employees select?
• When selecting funds, does my plan have true “open
architecture?”
Benchmarking plan design
•
•
•
•
How much do you match?
Auto enroll?
26.5%
Roth?
38.9%
Safe Harbor?
31.1%
PLANSPONSOR DC Survey, 2013
Cost of multiple administrators
VENDOR A
Large Growth
Mid Core
Small Growth
S&P500
Moderate
Aggressive
Conservative
VENDOR B
TDF 2010
TDF 2020
TDF 2030
Fixed Account
Large Growth
Small Growth
Mid Core
• How do your participants experience the plans?
• Is it worth making your employees pay significantly more?
• Confused participants disengage…
Diversify your Investment Options, not your administrator!
What your participants experience
Why go to RFP?
But my vendor said I will lose our 3%
“guaranteed” fixed rate account!
How do I survive an RFP process?
• Let the right consultant be your “shield”
• Pre-meeting with procurement
• Communication!
Favorable outcomes - investments
•
•
•
•
Simplified menu
TDFs / risk based
General accounts
Income products
The new retirement gap
•
•
•
•
•
•
Income throughout retirement
Investment risk transferred to the household
Emotional allocations to low return investments
New requirement for participant engagement
Low savings and budgeting
Low participation, loans, early withdrawals
Make your DC plan more like your DB plan
Target Date Funds
Do you understand your TDF?
To or through? Passive or active?
Best of both worlds
Coordinating from the member’s perspective
Plan Design / Hybrid Plans




DC plans are supplemental
Reduced DB benefit can lower future funding obligations
Can still provide guaranteed benefit
Offers protection from investment and longevity risk
DC Plan contribution rate required to achieve 75% replacement ratio¹
Entry Salary
DB Formula
Required DC Rate
w/o Soc Security
$
40,000
1.5%
6.8%
$
60,000
1.5%
6.8%
$
80,000
1.5%
6.8%
$
40,000
1.0%
12.1%
$
60,000
1.0%
12.1%
$
80,000
1.0%
12.1%
¹ Assumptions: entry age 30, retirement age 65, DB ratio 35 years service, interest rate 6%, annuity purchase rate 4%
How do your participants get information?
1:1
Salaried?
Financial
Advisor Commissioned?
Your
Personal
Advisor
Online
Tools
Call
Center
Redefine success
Participant
Outcomes
Conclusions
DC plan oversight recommendations
•
•
•
•
•
•
•
•
Establish governance bodies
Review and understand plans from participant perspective
Understand and benchmark fees (get help!)
Understand your employee demographics
Review your fixed account options
Review your TDF strategy
Design education strategy
Design and follow Investment Policy Statement (get help!)
Conclusions
Some DC plan design recommendations
•
•
•
•
•
•
•
•
Employee contributions are mandatory, begin immediately
Employee contributions start at full level
Contributions default into TDFs
10 – 15 core fund menu options
One recordkeeper!
1 year or less vesting of employer contributions
Option to annualize at or near retirement
Provide opportunities for advice
Favorable outcomes
Contact information
Dana Blydenburgh, Director of Retirement Services
City of Lakeland
863-834-8797
[email protected]
Steve Gordon, Director of Retirement Solutions
The Bogdahn Group
407-463-2312
[email protected]