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On a Mission to Provide Retirement Security

Employers like the Seventh-day Adventist Church are assessing their retirement plans to ensure adequate participant savings and cut back on such waste as high fees.

The Seventh-day Adventist Church takes a stand on many knotty social issues. Whether helping Ebola victims or trying to end violence against women, the church expresses its commitment to “spreading God’s love to the whole world.” That devotion extends to the retirement income security of its U.S.-based employees, including pastors, teachers and missionaries.

But it turns out that the mission of saving retirees from financial stress has challenges of its own. Like a growing number of private employers throughout the U.S. facing a funding shortfall, the Seventh-day Adventist Church froze its defined benefit plan in 1999. To get employees saving again, the church had to start from scratch to create a brand-new, defined contribution plan to provide retirement benefits. Since 2000 the Adventist Retirement Plans has grown to nearly $1.1 billion in assets and has 18,000 active accounts — and an additional 8,000 open accounts — at 150 different employers.

Designing a defined contribution plan with low fees and a means to educate a large, decentralized workforce is a real test for many employers. With traditional pension funds, employers keep fees low by pooling participant accounts, and there is no need to teach employees how to invest their savings. As savings plans replaced pensions, many employers offloaded the fee and education decisions to mutual fund companies and fund administrators. But some, like the Seventh-day Adventist Church, regularly review and update their retirement plans.

At the time of the 2000 conversion, church board members decided to build in a five-year review for its new 403(b) plan, which is much like a 401(k) but designed for nonprofit organizations that include schools and religious institutions. The review feature has given the church the opportunity to ask at regular intervals if its third-party administrator (TPA) is providing the services it requires. “It doesn’t make sense to lock ourselves in for a longer period of time, says Delbert Johnson, administrator of the Adventist Retirement Plans, headquartered in Silver Spring, Maryland. “It’s best practice to go through the RFP process every five years, not just [by making] phone calls.”

In light of the Tibble v. Edison International lawsuit currently before the Supreme Court and hundreds of other past 401(k) class-action lawsuits against sponsoring employers, it pays for retirement plan sponsors to demonstrate a thorough, periodic review of their plan, as well as to update and upgrade it.

During the Adventist plan’s five-year review in 2014, Johnson says, church officials asked key questions: “Are we paying the right price for TPA services? Does the company have the maximum passion for helping participants get to retirement? Does it have tools online for our broadly scattered base?”

The recent review led to the first change in plan administrator since its 2000 inception. AIG subsidiary VALIC, the original TPA, was terminated. “We weren’t unhappy,” explains Johnson, who has degrees in business administration and theology from Southern Missionary College (now called Southern Adventist University) and served 17 years as a missionary in Asia. “[We were] just following a prudent RFP cycle.”

Pirie McIndoe, a former VALIC employee and now director of defined contribution practice for Sibson Consulting, agrees. “When you transition a plan of this size and complexity, you don’t want to switch for the sake of switching,” he says. “It has to be for the long-term benefit of participants.” According to McIndoe, who was hired to assist the church with the transition, the change in plan administrator helped secure a $2 reduction in fees, to $9 per quarter on a $100,000 account.

Although relatively modest, the savings were part of a total package that also included better technology and engagement tools instituted by the Seventh day-Adventist Church’s new TPA, Empower Retirement. The plan has maintained its relatively generous employer contribution program of 5 percent — regardless of whether the employee contributes — as well as an additional 3 percent match if the employee puts in 3 percent, for an all-in total of 11 percent.

The Seventh-day Adventist Church is not the only employer to tackle the retirement savings beast in 2014. A second 403(b) retirement plan to undergo an update last year is Berkshire Health Systems, a health care network headquartered in Pittsfield, Massachusetts. The company wanted to improve the chances of an adequate retirement pot for its plan’s 4,400 participants.

Berkshire was early in getting people into the savings mode, having closed its defined benefit pension in 1990, a decade ahead of the Adventists, and launching its own defined contribution plan. But it proved difficult to get participation.

“We literally had a benefits representative chasing employees down the hallway to get them to sign up so we could give them pension dollars,” says Arthur Milano, vice president of human resources at Berkshire. “And they didn’t always do it.”

To ensure greater plan participation, the plan underwent a revitalization process in 2008 that included penning an investment policy statement and instituting an automatic enrollment program for all new employees at a 4 percent voluntary contribution level. A thorough review was again taken in 2013, when the company discovered that more than 55 percent of auto-enrolled employees hadn’t changed their participation rates in five years.

In a gambit to ratchet up employee savings to a level that is likely to produce a pool of assets that is actually adequate for retirement funding, beginning in 2014, the company decided to automatically increase the employee contribution in February by 1 percent until the rate is 10 percent. Auto-escalation is also being applied to employees contributing less than 10 percent. The employer match, which kicks in after a year of employment, starts at 2.5 percent, and with the employer matching dollars, the overall employer contribution maxes out at 4.5 percent. The average contribution is now 8.26 percent, says Michael Volo, a senior partner at retirement advisory firm Cammack Retirement Group in Wellesley, Massachusetts.

Berkshire is among a minority of employers. According to the “2015 Defined Contribution Trends Survey,” a poll of 144 plan sponsors published by Callan Investments Institute, only one third of defined contribution schemes, most of which are corporate plans with more than $100 million in assets, offer both auto-enroll and auto-escalation. The company was also able to secure major plan fee reductions.

“Five to ten years ago, our fees were a little more than two times what they are today,” explains Milano. Once $300,000, the annual plan fee has come down to approximately $150,000. The average expense ratio of Berkshire’s 16 investment funds, plus a target-date suite from T. Rowe Price, has been reduced to 0.7 percent, compared with the Morningstar average of 1.13 percent.

The investment committee also changed the target-date fund lineup to a more conservative array because of its fear that a lump-sum pool of assets obtained at retirement could be taken over with equities. A sign that the changes are working for the next generation of workers: “One of the great effects of the things we’ve done is that 87 percent of our employees under 30 years old are participating in the plan,” says Milano.

Follow Frances Denmark on Twitter at @francesdenmark.

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