A K-12 403(b) Plan Sponsor Consolidates Vendors

When the Internal Revenue Service (IRS) issued final regulations for 403(b) plans in 2007, many school systems had to look at the administration of their plans. Previously, K-12 school systems had little involvement with their plans; participants had individual relationships with annuity providers and plan sponsors did not monitor participant activity.

Kimberly Arakelian, assistant superintendent for finance and operations at Northbrook, Illinois, District 27, says that knowing what the new IRS regulations entailed, the school district went through a rigorous process of determining how it was going to administer the plan and carry out its fiduciary responsibilities going forward. It decided it needed a written plan document, a benefits committee that would determine the criteria for selecting or deselecting plan vendors, and compliance procedures and protocols for monitoring vendors and administering the plan.

Northbrook District 27 (NB27) originally thought it wanted to contract with a third-party administrator (TPA) and also consult with an investment adviser who would be a member of the plan committee.

Prior to the January 1, 2009, effective date for most of the 403(b) regulations, the district’s 403(b) plan had 21 vendors; most participants had individual annuity contracts and personal relationships with these vendors. During its process of reviewing plan administration, NB27 noted that annuity fees were high, nearly all were subject to wrap fees and participants were subject to surrender charges if they wanted to transfer their money to another vendor. The district also realized, since participants owned these investments, the district was not protected from fiduciary liability for participant investment choices. “We wanted to see if there was a better way,” Arakelian says.

One of the school board members for NB27 had heard about the Illinois Public Pension Fund Association (IPPFA). Founded in 1985, IPPFA is a not-for-profit organization with the primary function of educating and training all Illinois Public Pension Fund Trustees. By leveraging the buying power of hundreds of public sector employers, IPPFA built a co-operative that public sector employers are able to join at no cost—the Wise Choice for Educators Combined 457(b)/403(b) Plan.

Arakelian says NB27 prides itself on being an employer of choice, and it wanted to maintain this with its 403(b) plan. “We asked, what can we put in place that benefits participants, allows them great fund choice and reduced fees, and at the same time protects and helps the district in terms of exposure for fiduciary liability?” According to Arakelian, IPPFA offered everything the district wanted and more—plan documents, reduced fees, and a hold harmless agreement with certain investments.

Joel Babbitt, benefits coordinator with IPPFA in Chicago, explains that there are 21 core funds for the 403(b) portion of the plan and 22 for the 457(b) portion. In addition, participants are offered the Schwab Personal Choice self-directed brokerage account from which participants can choose from more than 5,000 mutual funds and exchange-traded funds (ETFs). When a participant opens a Schwab Personal Choice account, he or she must sign a hold harmless agreement with the school district.

“The plan gives [participants] even more investment options than they had before,” Arakelian notes.

Before adopting the Wise Choice plan, the school district had to get employees and the employee union on board. Getting the union to agree to a change can be a daunting process for some school districts, but Arakelian says NB 27 has a very good, collaborative relationship with its employees’ union; there is trust between the district administration and the union because of transparency of information.

“One of key processes we always do with change is meet with the union president and vice president, as well as faculty union leadership in each school, and educate them about the change. For the option of moving to the Wise Choice plan, we helped them understand the increase in employer responsibility due to the new regulations, and gave them comparative data about the fees charged by previous advisers/annuity providers and how fees would be reduced for participants,” Arakelian says. The union agreed there was a need to move to a plan that benefited employees and lowered risk for the school district.

Once the decision was made to go with IPPFA, Babbitt and Debby Karton, benefits coordinator at IPPFA, visited every school in the district and educated employees about the benefits of Wise Choice. The new plan was implemented in January 2010.

Realizing that participants have individual relationships with their advisers/annuity providers, Babbitt and Karton met with each person to show them their choices and potential lower costs. Over the past five years, the two have provided quarterly meetings at each school and are available for individual meetings either in the district or off-site.

Because of this effort, the school district does not have a problem dealing with legacy vendor contracts. Babbitt says he and Karton would call old vendors with participants and help them understand costs and about the differences between the plans. After reviewing the facts, if it made sense for the participants to consolidate their accounts, they did so. “About half did so in the first year and most of the rest did so over the next 18 months,” he says.

In addition to more fund choices for participants and less fiduciary liability for the school district, the move to a single-provider plan led to an increase in employee participation. Previously, 78 out of about 200 employees participated in the 403(b); now 118 out of 205 eligibles participate in the combined 457(b)/403(b)—a good participation rate considering all employees participate in a defined benefit (DB) plan. The combined 457(b)/403(b) plan has $6.7 million in assets.

But, the improvement Arakelian is most excited about is the reduction in fees for participants—between 40% and 50% over the last five years. “In dollars, it’s been roughly $170,000!” she exclaims.

For other K-12 plan sponsors that may be considering vendor consolidation, Arakelian says, “With $170,000 going back to our employees, I would tell them to not be afraid to move forward. Yes, there are long-term relationships between participants and vendors, but if you show participants the benefits in the right way, it’s an easy choice. I would really encourage education and transparency of information.”