By Ben Taylor and Michael Joecken
In the most recent edition of the DC Observer, we described the restructuring of a city-sponsored 457(b) plan with nearly $1 billion in assets that uses multi-manager funds. The revamping process examined the investment fund structure, participant enrollment, and investment management fees.
In our article we detailed the steps the plan, working with advice from Callan, took to meet its goals for the restructuring, including:
- Replacing its custodian
- Adopting Callan’s recommendation for a three-tier fund lineup
- Tier I offers choices for participants who want a “do it for me” option
- Tier II is for participants who want more control within certain guidelines
- Tier III is for “do it myself” investors
- Shifting to target date funds from target risk funds
- Simplifying the structure of, and reducing the number of managers for, its equity and fixed income white label fund options
- Conducting a re-enrollment to re-engage participants
As a result of these steps:
- The savings rate went from 4.7% to 5.7%.
- The participation rate initially improved from 63% to 83%; one year later it stood at 91%. The biggest improvements were seen among women, minorities, and low-wage employees.
- Asset allocation improved dramatically, with do-it-for-me fund assets jumping to 24% of plan assets.
- Due to outreach efforts, a majority of participants made active elections during the re-enrollment process, even if the active election was to choose to remain in the default TDF after having that option explained to them.
- Fees for the active equity fund declined to 41 bps.
- Fees for the active fixed income fund declined to 35 bps.
- Fees for all index funds declined due to a move to collective investment trusts.
- Recordkeeping costs were reduced.
Our work with this plan and others has led us to identify the following principles to help plan sponsors achieve the best outcomes when they re-evaluate their plans:
- Start the process with clear goals in mind
- Be prepared to reevaluate all aspects of the plan from the recordkeeper to fund selection to participant communication
- Identify the committee or individuals who will participate in the process and ensure they have the necessary time
- Understand the process may be lengthy, and have a realistic timeline
- Be prepared to make critical, interwoven decisions as the process unfolds
- Strongly consider making all changes at once rather than handling the changes in stages
- Measure outcomes
For full details of the restructuring, please find our paper here.
