403b Retirement Plans
From Drmills
Faculty discussion Wiki for LMU 403b retirement plan providers Q & A
This page is for comments, and questions and answers, regarding the LMU 403b retirement plan under consideration.
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The faculty members who were on the sub-committee of the University Comprehensive Benefits Committee will try to answer any questions you may have.
First, please review the information provided to faculty for the 403b retirement plan information sessions (PDF file):
http://drmillslmu.com/retirement-403b-plans.pdf
Below are some emailed answers to faculty inquiries from the faculty members that served on the sub-committee to review and select a 403b retirement plan provider:
I was one of the faculty members on the sub-committee that reviewed the information regarding
the three retirement plan finalists, Fidelity, Diversified, and TIAA. We
invited each of these companies to come on campus to give presentations to
the committee. We also had extensive help regarding technical and financial
issues from an outside, independent consulting firm.
After reviewing all of the information, and the company presentations, the vote
of the committee to recommend Diversified was unanimous. There were no
dissenting opinions, despite the fact that several of us came to these
deliberations with an initial preference for TIAA. However, as more information became
available to us, it became increasingly clear that Diversified offered the best plan
and options. (See the previous email sent by HR that detailed some of these
advantages.)
I would be happy to answer any questions you may have regarding these
deliberations and the issues that led to the unanimous recommendation of
Diversified.
Best,
-- Mike
Michael E. Mills, Ph.D
Associate Professor
Psychology Department, UNH 4757
Loyola Marymount University
One LMU Drive
Los Angeles, CA 90045
To (briefly) answer some of Dorothea's questions, based on my best understanding:
- we should have more than one plan (for a long list of reasons mentioned by different individuals);
Due to changes in 403b laws that go into effect Jan 1st, LMU will be legally responsible for
record keeping, and will have additional legal fiduciary responsibilities. TIAA could not
provide less than a 3 day window required by Payroll to post retirement funds. Further,
TIAA and Fidelity do not cooperate on regarding coordinating record keeping.
The main advantage to having more than one retirement plan provider has, historically, been to give more
investment options to participants. Via the mutual fund (or "brokerage") window
offered by Diversified, faculty will have access to choose from over 1,500 funds.
- we also wanted to know how much it would cost to administer different plans (maybe we would be willing to pay that)
The management fees charged by Diversified to both faculty, and the university, were
substantially less than those of TIAA or Fidelity.
- what assets exactly would be part of the plan?
See the proposed lineup in the document you attached. Also, again, via the
brokerage window, just about any mutual fund type is available.
- how exactly are fees calculated? how much would they go down when?
The outside consultants crunched the numbers -- I don't recall the exact numbers, but
over a period time, Diversified will save both faculty, and LMU, substantial sums
in terms of management fees.
Again, a summary of the advantages of Diversified was emailed out a while back
(not the same document as the attached Word document). Perhaps someone can rummage
that out of their "old email."
Cheers, Mike Mills
Dear James (and the reference group):
I have followed your initial query and the responses to it. Your concerns were very much at the forefront of the committee's concerns, and in particular the concerns of the faculty representatives. On a personal note, I was very much concerned over the potential loss of TIAA-CREF for my own personal retirement investments and for potential impact on faculty recruitment.
As Mike Mills has outlined in his response, based on the evidence presented concerning the 403b administration changes and the strength of the packages offered by the finalists in the process, Diversified was clearly stronger. They offered a stronger portfolio, stronger servicing, and bring a speciality in retirement investing in both the for profit and non-profit sectors. They have a strong and growing portfolio of higher education accounts. As a subsidiary of Transamerica, the company is a substantial player.
As best I know, the demand that you refer to that some institutions must have more than one 403b provider is not something that is legislated, but rather negotiated in the course of labor relations. As we understand it, with the changes in the laws governing 403b administration, offering more than one provider, while possible, is more complex and more risky to the institution and to participants. This risk is centered primarily in record-keeping and coordination between providers who are inherently competitors that are put in bargained role of cooperating in order to gain account access. For a bigger institution, with more employees, it might be possible to negotiate a favorable package with multiple providers, although even in this instance, from what we clearly saw in the package presentations, providers offer much stronger investment options, with lower fees, when they bid as a sole provider/record keeper. This was the case with Diversified, Fidelity, and TIAA-CREF. So, if LMU were to go the route of offering multiple providers, then the offerings from all providers would be weaker and frankly, it was clear that this would affect the yield on investment for all LMU employees.
On your chief concern about the continuance of TIAA-CREF, this matter was taken very seriously. In fact, based on the data regarding investment performance and servicing, it is my sense that TIAA-CREF would not have been advance to the finalist group were it not for the concerns of all of the committee members, and in particular the faculty group. Nonetheless, it was clear from both the data analysis and from TIAA-CREF's presentation that what they had to offer was notably weaker. This was true in terms of investment performance and servicing. In addition, and this surprised many of us, the often touted lower costs of TIAA-CREF, while they were low, were in line with those offered by Diversified. This, in addition to the clear superiority of the Diversified service package, that included a full-time employee based on the LMU campus, made their package stand out. A final matter that strengthened our assessment of Diversified over both TIAA-CREF and Fidelity is that they were a neutral provider of the best porfolio of options as they had no built-in conflict of interest to offer or push their own investment products. We saw this as a strong advantage, especially considering the current moral failings of the investment community.
I hope this response helps clarify the thinking behind the sub-committee's recommendation. While I can't answer some of the technical questions that have been raised, by Professors Konow, Morelli, and Herreiner, I can say with confidence that the investment package is strongest with a sole provider and that Diversified clearly offered the strongest package in terms of history of strong returns with fees that were comparably low to those offered by TIAA-CREF. And while you may not have felt it, it was clear from a number of data points that TIAA-CREF had standing service liabilities, was rated weakly in independent surveys of this, and from their presentation, were not making expeditious progress towards remedying these matters.
In short, the sub-committee shared all of the concerns that you have voiced and I am confident that, because of the sensitivities involved within our community, gave the TIAA-CREF option special attention and consideration. Yet, even with this, at the end of the day, their package was not as strong. It is worth mentioning that LMU is not unusual in recent times in moving away from TIAA-CREF. While the choice has not always been Diversified, our information gathering pointed to some very major institutions, such as Stanford, Minnesota, and others, moving away from TIAA-CREF fueled by many of the concerns that we found evident. Thus, our recommendation, while it involves considerable change, is not an unusual one in today's climate and it seems likely that other institutions will make similar moves as they weigh the benefits of a sole provider/record keeper versus the weaker packages likely to be offered by providers in a multiple vendor situation.
I know I not able to respond every concern that has been put on the table, but hopefully this helps. In my estimation, the process that the sub-committee went through in formulating this recommendation was remarkable in its transparency and candor. I think few expected to have ready agreement about the resolution of a recommendation. That we were unanimous in our decision, speaks really to the strength of the Diversified proposal, even though, admittedly, many of us would have liked to have seen something stronger to build the case for continuance of TIAA-CREF in the mix. Yet, in our collective estimate, this was not at play, and thus our recommendation for Diversified as sole 403b provider and record-keeper.
Best regards,
Larry
Lawrence A. Wenner
Von der Ahe Professor of Communication & Ethics
Brief, very brief, answers to James' questions -- again, to the best of my knowledge, below. There are
reams of analyses that were provided to us from the consulting company. For any interested faculty
member these documents can provide detailed additional info to any interested faculty member.
How big is Diversified relative to TIAA in terms of assets, which goes in large part to my question about solvency?
--> Diversified is only a "record keeping" company -- that is, they offer a 403b plan that is composed of
mutual funds offered by other companies. They have no mutual funds of their own to sell.
What experience do they have relative to TIAA with academic institutions?
--> I'm not sure about that, but I do know that TIAA has had record keeping problems, and I understand that LMU, and
other academic institutions, have expressed dissatisfaction, especially with their customer service and their ability
to provided needed legal record keeping / accounting data in a timely fashion. TIAA themselves admitted
to some of these problems which they are "working on."
Have other schools adopted them, and what customer satisfaction do they report?
--> There may be info about this in the consultants reports, I don't specifically recall.
If they have performed well over the reported period, is it simply because they invested in risky assets that rise in good times, but they have reported, or been tested, in bad times?
--> Again, Diversified is only a 403b plan administrator and accounting company. They do not provide any mutual
fund products themselves. LMU selects the basic lineup of funds, which it may change at its discretion. Presumably,
LMU would select funds with good performance records and low expense ratios.
How important is it to faculty hiring and retention to be in the most common, and almost universally accepted, retirement plan (TIAA)?
--> IMO, the lower fees, and the greater choice and number of funds in both the regular lineup, as well as via
the "brokerage window" option, offers many advantages over the far more limited TIAA offerings. I think most
faculty, and new faculty recruits, would prefer the choices and services offered
by Diversified. Should any faculty be interested in investing in a TIAA mutual fund, many of the TIAA
mutual funds will be available to faculty via Diversified.
Of course, one can get almost any ranking, depending on what criteria were chosen to rank. How robust is the ranking to the use of these or other criteria?
-- The consulting firm provided an extremely detailed set of criteria and data, and arrived at overall rankings on
several criteria. This data is available, I presume, to any faculty member to review.
I don't mean to be suspicious, but is there independent evidence that we really have to go to one plan, e.g., is this what all universities are doing?
-- It is my understanding, based on the legal information provided by the consultant's attorney (who attended all of the meetings
and company presentations) that the new 403b regulations that go into effect Jan 1st have far more stringent recording keeping
and auditing requirements, and that coordinating that information between two different 403b administrators would be both
difficult and expensive. Should they make mistakes in the coordination, it is my understanding that LMU
could be held liable.
Cheers, Mike Mills
I agree that presenting the options to the stakeholders is a good idea. The smail and email
communications from the administration, and from HR, as well as the multiple information
sessions held by HR, was their effort to keep the faculty informed, and to gather feedback.
Whether that was sufficient, or the best process, can be legitimately questioned. However, I'm sure
the faculty who participated on the sub-committee of the University Comprehensive Benefits Committee
that evaluated the 403b options would be willing to participate in an informational meeting for faculty to
answer any questions, and to relay any concerns to HR and the administration. However,
this would need to be done soon, given the current timeline and deadlines.
Regarding keeping TIAA for another year, honestly, my sense is that TIAA excluded itself from consideration
after it explicitly acknowledged that, despite our clearly stated requirements, it was unable to post
retirement fund contributions within the time period needed by LMU's Payroll Department -- 2 days.
Apparently, this is a non-negotiable issue from LMU's perspective (I am not personally
aware of the technical reasons for this.)
Finally, it is important to remember that by switching to Diversified, we are not "losing"
access to TIAA-CREF (actually CREF) mutual funds. Faculty can continue to invest in
these funds should they desire via the "brokerage window" option. In addition, faculty
may keep all of the funds they have currently accumulated in TIAA-CREF without any changes.
Cheers, Mike Mills
I am a member of the sub-committee and have been following the exchange. The questions raised are important and perhaps best discussed face-to-face. But for now, let share a few thoughts.
First, let me say that I am more than happy to share my thoughts of the process, answer questions, or attend additional information sessions. Secondly, I am pleased with the recommendation of the committee, and I am proud to have worked with this group of rigorous, skeptical faculty. We all vigorously pursued the concerns and interests of the faculty. Third, having reviewed the independent research, having examined the bids presented, and having heard the presentations made by the three finalists, I can say that if the IRS had not impelled us, the faculty should have demanded such a review long ago.
I entered the process as a proponent of two recording entities and a strong supporter of TIAA/CREF. However, I was stunned to discover the distance between the reputation of TIAA/CREF and their actual performance in a number of important areas.
Again, I look forward to talking with you, and I will be happy to share any information or research,
KJ Peters
Comments or Questions:
Small differences in expense ratios have big effects
The expense ratios for CREF-TIAA and Vanguard are often lower and worth noting in that a mere 1/2 percentage point smaller expense ratio can easily account for a 25 percent larger final retirement value some 40 years later. Likewise this is true for 12b-1 fees (a fee allocated for distribution referring to a section of SEC rules from the 1940s). However, some funds may deserve a bit higher expense ratio to offset the associated activities for funds ferreting out smaller growth companies and to a lesser degree for funds operating in developing markets.
-- Chuck Higgins, Finance and Computer Information Systems
- As was noted in the 403b retirement plan information sessions (PDF file):
http://drmillslmu.com/retirement-403b-plans.pdf
- "In aggregate, the fees of the funds proposed by Diversified are in line with
:those proposed by TIAA-CREF. Over time, as assets continue to go to Diversified, modifications to the fund
:lineup are very likely to result in fund fees that will be lower than what TIAA-CREF proposed"
- -- Mike Mills
Question:
I don't know exactly how the percentages in the information sheet were obtained, but the percentage given for the TIAA guaranteed is considerably lower than the published percentages at the TIAA website. For the standard annuity (not supplemental) the percentages never fall below 5%. In fact, the rate is 6.00% for money put in right now.
- The data on the PDF info sheet indicates that the 5 year annualized return (6/30/08)
for the TIAA Traditional ('Stable Value/Guaranteed") was 4.42%. The similar
offering by Diversified, the Galliard Guaranteed Pool Fund, had a return of 4.25%
over the same period. I don't think TIAA (or anyone) guarantees a 6% return -- perhaps the 6% refers to a 1-year, or 6 month, recent performance? TIAA does say that they guarantee a minimum 3% return, but, given example of the current credit crisis, who knows if anyone can actually back such a statement...
- -- Mike Mills
