HOT TOPICS IN HIGHER EDUCATION RETIREMENT PLANS · - Governmental plans (State ORP, etc.)...

HOT TOPICS IN HIGHER EDUCATION RETIREMENT PLANS

Cammack Retirement Group | July 30, 2020

2Cammack Retirement Group | © 2020 All Rights Reserved | For Plan Sponsor Use Only

TODAY’S PRESENTERSHot Topics in Higher Education Retirement Plans

Jeffrey A. LevyManaging Partner

Tracey M. Manzi, CFA®Vice President,

Investment Services

Joey Payne, MBAVice President,

Senior Consultant

Michael A. Webb, CEBSVice President


• Retirement Plan Features and COVID-19

• Integration of ESG and World Bond Asset Classes

• Fee Levelization

• Recordkeeping Fees (Flat vs. Basis Points)

• Small Balance Cash-Outs (Automatic Rollovers)

AGENDAHot Topics in Higher Education Retirement Plans


Hot Topics in Higher Education Retirement Plans

RETIREMENT PLAN FEATURES & COVID-19


• Benefits: Approach can be modified at any time and for any reason; truewhether the contribution is a matching or non-elective (base) contribution

• This flexibility became an administrative advantage for employers who wished to suspend/reduce contributions, due to financial reasons, during the COVID-19 pandemic

• Other factors that may impact whether a stated match or formula is needed in the plan document, and the timing and feasibility of changes:

- Union contracts

- Faculty & staff perception of benefits

- Governmental plans (State ORP, etc.)

DISCRETIONARY CONTRIBUTIONSRetirement Plan Features & COVID-19

Plan documents can be drafted to allow for a discretionary employer contribution (versus a stated match or formula)


• It is NOT required for many plan types, and many 401(k) plans do not have it at all

• The problem for plans that offer this benefit is that notarized spousal consent, or consent personally witnessed by a designated employee, is required for the participant to elect any form of distribution other than the QJSA

- Administratively burdensome since it effectively prevents paperless distributions and loans

- Can be difficult to eliminate the provision in some 403(b) plans

QUALIFIED JOINT AND SURVIVOR ANNUITY (QJSA)Retirement Plan Features & COVID-19

The QJSA is a standard form of retirement benefit in many 403(b) plans, payable in the form of an annuity for the life of the participant; and, if the participant is married, a survivor annuity for the life of the spouse, payable upon the death of the participant


In most 401(k) plans (and some 403(b) plans), a participant cannot continue loan repayments if he/she terminates employment with the sponsoring employer

LOAN OFFSET AT TERMINATION OF EMPLOYMENTRetirement Plan Features & COVID-19

• Instead, the entire outstanding loan balance is offset from the participant’s account balance

• This has always been a problematic provision, since it unnecessarily erodes retirement savings; however, it has become a disaster during the pandemic, as laid-off participants have an additional tax burden at, presumably, the worst possible time

• Fortunately, COVID-19-affected participants, as defined under the CARES Act, can spread the taxes out evenly on the distribution, avoid the 10% penalty, and repay the distribution within three years

- Despite these changes, providing participants with flexibility for loan repayment at employment termination is far preferable



GLOBAL BONDS


COMPLEMENTARY FIXED INCOME ASSET CLASSGlobal Bonds

Source: JPMorgan Source: AB


Global Bonds

Source: JPMorgan

Selected Developed Bond Market Yields (%)

--- MATURITY ---

Official Policy Rate

2 yr 5 yr 10 yr 30 yr

Switzerland -0.75 -0.68 -0.57 -0.34 -0.13

Germany -0.50 -0.66 -0.57 -0.35 0.06

Netherlands -0.50 -0.55 -0.39 -0.09 0.19

France -0.50 -0.52 -0.27 0.10 0.82

Austria -0.50 -0.48 -0.22 0.09 0.48

Belgium -0.50 -0.47 -0.17 0.18 --

Ireland -0.50 -0.28 0.00 0.21 0.90

Spain -0.50 -0.08 0.25 0.78 1.58

Italy -0.50 0.62 1.11 1.59 2.48

Greece -0.50 -- 1.36 1.78 --

Japan -0.10 -0.18 -0.12 0.00 0.44

Sweden 0.00 -0.31 -0.44 -0.17 --

UK 0.10 0.04 0.13 0.31 0.67

US 0.13 0.22 0.41 0.72 1.34

Australia 0.25 0.21 0.44 0.97 1.78

Canada 0.25 0.40 0.59 0.77 1.35

Data as of 04.13.2020Source: Investing.com, Riskbank.se.com, Nationalbanken.dk.com

FIXED INCOME LANDSCAPE: CHANGED DRAMATICALLY



SOCIALLY RESPONSIBLE INVESTING


ESG EXPLAINEDSocially Responsible Investing

12

ENVIRONMENTAL

Sustainably themed investing is an investment approach that considers environmental, social, and governance (ESG) factors in portfolio selection and management.

SOCIAL GOVERNANCE


DIFFERENT TYPES OF APPROACHESSocially Responsible Investing

13


• Also known as ESG (environment, social, and governance) investing, ETI (economically targeted investing), impact investing or sustainable investing

• Managers use various methods to build socially responsible/ESG portfolios, including exclusionary screening, best-in-class selection, active ownership, thematic investing, impact investing and ESG integration (most common approach)

• DOL issued a proposed rule in June 2020 that indicates the DOL’s growing concern that market trends emphasizing the non-economic benefits of ESG investment may lead ERISA plan fiduciaries to make investment decisions for reasons other than maximizing returns for plan participants

- The proposed rule confirms that an ERISA fiduciary’s duties of prudence and loyalty are satisfied where the fiduciary has “selected investments and/or investment courses of action based solely on their pecuniary factors and not on the basis of any non-pecuniary factor”

• Morningstar is now scoring mutual funds with sustainable-investing grades related to ESG screens applied to the underlying securities in each fund

EXPANDING ASSET CLASSES & DIVERSIFICATION OPTIONSSocially Responsible Investing

18%of plans offer a socially responsible fund1

64%of Millennials said ESG issues are important in their investing decisions; however, currently only 17% of Millennials, are participating in ESG investing2

1 Callan 2019 ESG Survey 2 Allianz ESG Investor Sentiment Study, 20193 American Century Investments 2019 Survey

of Plan Sponsors and Retirement Savers

14

37%of participants expressed interest in ESG options3



RECORDKEEPING FEES


Recordkeeping fees are paid to the retirement plan provider for plan administration services

THE BASICSRecordkeeping Fees

• Fees are typically paid through the net expense ratio for each investment

• Bundled Arrangement: plan provider retains the revenue derived from each investment in the menu

- Plan provider typically sets the investment menu and investment share class

• Unbundled Arrangement: plan sponsor negotiates required revenue and any excess revenue is placed into a Revenue Credit Account for plan expenses

- Allows recordkeeping fees to be paid with a flat per-participant fee or as a percentage (basis points) of assets

- Recordkeepers who are also insurance companies typically require moving to an open architecture mutual fund platform to unbundle fees and for the plan to choose investments


RECORDKEEPING FEES: FLAT FEE vs. BASIS POINTS Recordkeeping Fees

Variations on recordkeeping fees are being developed to cap fees at certain levels and protect new participants

Benefits of moving to flat fee

Easier to understand for employees/plan participants

Ensures everyone pays the same fee

Downside to flat recordkeeping fee

Employees with lower balances pay a higher percentage of fees for

recordkeeping:

ACCOUNT BALANCE: $10,000

ACCOUNT BALANCE: $250,000

Flat Fee ($80)

0.8% ($80/$10k)

0.04% ($80/$250k)

Basis Points (0.08%)

$8.00 $200


• Let’s assume we are changing recordkeepers and the legacy assets in the prior recordkeeper annuities are not eligible for mapping:

• If the plan transitions to an $80 flat fee under the new plan, a participant pays $68 more in recordkeeping fees:

WHEN DOES MOVING TO FLAT FEE NOT WORK? Recordkeeping Fees

NEW RECORDKEEPER OLD RECORDKEEPER COMBINED FEE

Year-1 Assets $15,000 $150,000

Fee 0.08% 0.08%

Total $12 $120 $132

NEW RECORDKEEPER OLD RECORDKEEPER COMBINED FEE

Year-1 Assets $15,000 $150,000

Fee $80 0.08%

Total $80 $120 $200



FEE LEVELIZATION


What does it mean to levelize recordkeeping fees?

• Revenue to pay for recordkeeping fees is typically included in the fund’s net expense ratio

• TIAA Annuities and many actively managed mutual funds (proprietary and non-proprietary) contain monies earmarked for recordkeeping and other expenses

- TIAA-CREF annuities include “plan services expense offset”- Actively managed mutual funds may have revenue share, depending

on the share class (e.g., R4 vs R6)- Index funds may not include revenue share

THE BASICSFee Levelization


Why should plan sponsors levelize recordkeeping fees?

WHY LEVELIZE FEES?Fee Levelization

Fairness issue - ensures all plan participants pay an equal amount regardless of fund selection

More plan sponsor control - Negotiating required revenue, utilizing mutual funds allows the plan sponsor to control the revenue paid to the recordkeeper

- Flat recordkeeping fees (e.g., $80 per participant, per year) keeps recordkeepers from realizing large market-related increases (e.g., assets up 10% / recordkeeping fees up 10%), versus inflationary increases (e.g., 2-3% per year)

- Percentage recordkeeping fees (basis points) can include a cap of overall fees (e.g., $250K) paid to recordkeepers to keep overall recordkeeping fees from growing beyond inflation

Issue has been cited in most higher education retirement plan lawsuits


Example: Current recordkeeping fee is 8 basis points, $300M plan, 3,000 plan participants

• Prior year plan revenue = $240K ($300M x 0.08%)

• Flat fee equivalent = $80 ($240K/3,000)

– Flat fee equivalent would be higher (e.g.,$85) due to built-in inflation

• Plan sponsor negotiates an annual fee not to exceed $247,200 (3% increase), assuming the same number of participants and average account balance remain the same.

• Participants are charged 8 basis points (bps); any excess revenue goes to the revenue credit account

RECONCILING RECORDKEEPER FEESFee Levelization


SHARE CLASS EXAMPLEFee Levelization

FUND NAMEPROSPECTUS NET EXPENSE

RATIO (%)

12B-1(%)

PLAN SERVICES EXPENSE OFFSET

(%)

TOTAL REVENUE SHARE (%)

NET INVESTMENT

FEE (%)

CREF Stock R2 0.35 0.00 0.20 0.20 0.15

TIAA Real Estate 0.79 0.00 0.24 0.24 0.59

TIAA Lifecycle Index 2030 Premier

0.25 0.00 0.15 0.15 0.10

TIAA Lifecycle Index 2030 Institutional

0.10 0.00 0.00 0.00 0.10

FUND NAMEPROSPECTUS NET EXPENSE

RATIO (%)

12B-1(%)

SUB T/A/REVENUE SHARING

(%)

TOTAL REVENUE SHARE (%)

NET INVESTMENT

FEE (%)

American Funds Growth Fund of America Class R-4

0.66 0.25 0.14 0.39 0.27

American Funds Growth Fund of America Class R-6

0.31 0.00 0.04 0.04 0.27

*17 different share classes for American Funds GFA


TIAA LEVELIZED FEES ILLUSTRATIONFee Levelization

FUND

FUND REVENUE SHARING:

CREDIT (BPS)

RECORDKEEPER (RK) REQUIRED

REVENUE: DEBIT (BPS)

REVENUE CREDIT ACCOUNT (RCA)

FUNDING: DEBIT (BPS)

TOTAL PARTICIPANT CREDIT (+) OR DEBIT (-) (BPS)

CREF Annuities R2 20 (8) (3) 9

TIAA Real Estate 24 (8) (3) 13

TIAA Traditional 15 (8) (3) 4

Mutual Funds R6 0 (8) (3) (11)

Assumptions:

Revenue Required for Recordkeeping 0.08% (8 bps)

Additional Revenue to Pay Other Plan Expenses 0.03% ( 3 bps)

Total Revenue Needed in Revenue Credit Account 0.11% (11 bps)



SMALL BALANCE CASH-OUTS (AUTOMATIC ROLLOVERS)


In a small balance cash-out, participants with less than $5,000 in the plan are moved to an IRA provider, upon separation

• Eliminating participants with low account balances can produce savings to the plan on recordkeeping fees

• Example: Current Recordkeeping fee is 9 basis points, $300M plan, 3,000 plan participants

- Average account balance is $100K - Plan has 1,000 “separated” participants with assets under $5,000,

assets total $2M ($2K avg.)- Small balance cash-outs:

New average account balance of $149K New fee of 8 basis points $30K annual plan savings ($300M x .01%)

WHY UTILIZE SMALL BALANCE CASH-OUTS?Small Balance Cash-Outs


Implementing a small balance cash-out

• Each of the plan documents (e.g., 401(a), 403(b), 457(b)) needs to be updated

• IRA provider needs to be selected

- Most vendors have one that can be contracted with through the recordkeeping relationship

- Public universities may be able to avoid RFP Procurement criteria - no university money involved IRA fees typically around $30 annually

• Termination dates sent to recordkeeper trigger employees receiving a notice of the pending transfer to the IRA provider from the recordkeeper

- Terminated employee can have funds transferred to their personal IRA/retirement plan or take a distribution

IMPLEMENTING A SMALL BALANCE CASH-OUT FEATURESmall Balance Cash-Outs


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QUESTIONS?


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DISCLOSURES

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author and do not necessarily represent the opinions of Cammack Retirement Group.

Cammack Retirement Group, Inc. is located at 40 Wall Street, 56th Floor, New York, NY 10005 (Tel. 212-227-7770) and consists of three subsidiary firms providing a wide range of pension consulting services to our clients. These entities include:

• Cammack LaRhette Advisors, LLC: Providing investment advisory services as an SEC federally registered pension consultant advisor. Main location is at 100 William Street, Suite 215, Wellesley, MA 02481 (Tel. 781-237-2291).

• Cammack LaRhette Brokerage, Inc.: Providing access to investment products; registered with FINRA as a limited broker dealer. Main location is at 100 William Street, Suite 215, Wellesley, MA 02481 (Tel. 781-237-2291).

• Charles W. Cammack Associates, Inc.: Providing insurance products and general pension consulting, including actuarial services. Main location is at 40 Wall Street, 56th Floor, New York, NY 10005 (Tel. 212-227-7770).



APPENDIX


How do you check plan document for this flexibility?

25. NONELECTIVE CONTRIBUTIONS (TYPE/AMOUNT): (3.04(A)). The Employer Nonelective Contributions under Election 6(d) are subject to the following additional elections as to type and amount. All Nonelective Contributions, other than those described in (e), are limited to Participants who have Compensation (and may be further limited as described elsewhere in the Plan or this Adoption Agreement. (Choose one or more of (a) through (d) as applicable.):

(a) [ ] Discretionary. An amount the Employer in its sole discretion may determine.

(b) [ ] Fixed. (Choose one or more of (1) through (6). Reference to Participants are limited to Participants eligible to receive an allocation of Nonelective Contributions.):

(1) [ ] Uniform %. % of each Participant's Compensation, per (e.g., Plan Year, month).

(2) [ ] Fixed dollar amount. $ , per (e.g., Plan Year, month, Hour of Service, per Participant per month).

(3) [ ] Age-Graded. The following

DISCRETIONARY CONTRIBUTIONSAppendix


How do you check plan document for this flexibility?

42. JOINT AND SURVIVOR ANNUITY/SPOUSAL CONSENT REQUIREMENTS (6.04). Subject to the terms of the Investment Arrangement Documentation, the joint and survivor annuity distribution requirements of Section 6.04 and no other spousal consent requirements apply unless otherwise elected below (Choose (a) only if the Employer wishes to follow the Joint and survivor annuities rules to which the plan would otherwise not be subject.):

(a) [ ] Joint and survivor annuity applicable. Section 6.04 applies to all Participants (if selected, then annuities are a form of distribution under the Plan even if 39(b)(4) is not selected):

One-year marriage rule. Under Section 6.04(H) (Choose (1) or (2)):

(1) [ ] Applies. The one-year marriage rule applies.

(2) [ ] Does not apply. The one-year marriage rule does not apply.

(b) [ ] Spousal consent required. Spousal consent is required for (Choose one or both):

(1) [ ] Distributions. A married Participant's Spouse must consent to a distribution (other than Required Minimum Distributions).

(2) [ ] Beneficiary designations. A married Participant's Beneficiary will be the Participant's Spouse unless the Spouse consents to an alternative Beneficiary.

QUALIFIED AND JOINT SURVIVOR ANNUITY (QJSA)Appendix

HOT TOPICS IN HIGHER EDUCATION RETIREMENT PLANS · - Governmental plans (State ORP, etc.)...

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