Administration May 3, 2018

Retirement Plan Exchanges for 403(b)s

Speaking at the Plan Sponsor Council of America (PSCA) 71st Annual National Conference, Brodie Wood, SVP of healthcare, education and not-for-profit markets at Transamerica Retirement Solutions, discussed the efficiencies and benefits a closed MEP can offer not-for-profit 403(b) plans.

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In a case of perfect timing, Transamerica announced it is now offering its first-ever 403(b) multiple employer plan (MEP) for higher education, created in partnership with the Wisconsin Association of Independent Colleges and Universities (WAICU), on the same day Brodie Wood, SVP of healthcare, education and not-for-profit markets at Transamerica Retirement Solutions, spoke to attendees of the Plan Sponsor Council of America (PSCA) 71st Annual National Conference about for 403(b) plans.

A month ago, 14 Virginia private colleges, members of the Council of Independent Colleges in Virginia (CICV) announced plans to join a newly created MEP.  

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Wood noted that closed MEPs have been used in the for-profit market for a number of years. However, he said that not-for-profits tend to be less competitive and have realized that by pooling assets together, they may be able to offer a better solutions.

According to Wood, the efficiencies MEPs provide to 403(b) plans include:

  • Use of independent, renowned professionals;
  • Complete transparency and objectivity;
  • Reduce administrative burden;
  • Economies of scale; and
  • De-risk plans, i.e. balances complexity of choice with scale; ensures payroll data is clean; provides consistent communication to adopting members and participants; maintains one fund menu of independently selected/managed fund (no conflicts); and delegates authority to mitigate risk.

Other benefits include access to more investment choices, access to enhanced benefits at lower cost, reduction of fiduciary exposure, one Form 5500, no audit and strong participant education support, Wood said.

For associations, such as the WAICU, there are also benefits, Wood noted. “Associations are looking for a way to become relevant for members, recruit new members, retain existing members, de-risk plan operations and build a market of skilled employees,” he said.

There are options for reducing fiduciary exposure or sharing exposure. For example, Wood said the Virginia plan pulled in a 3(16) plan administrator. But, he pointed out, “The challenge in the not-for-profit market is there are not a lot of providers that have both the expertise in MEPs and not-for-profit retirement plans.”

Wood said there is also a lot of value in payroll aggregation; some MEPs may want to hire a payroll provider or aggregator. He said the Wisconsin plan is manageable by Transamerica but it would get more complicated with bigger entities and/or with those with multiple payrolls.

As far as pricing, 403(b) MEPs could have mega plans and small plans, so consideration of costs for each member should be given. Transamerica uses break-point pricing.

Wood said individual schools struggle to offer participant education, and a provider or adviser to an MEP plan can customize education for different members, or the plan could establish a comprehensive communication package members can use. He noted that the Virginia plan engages a third party for education and advice.

MEPs help 403(b) plans pare down investment options, but for plan participants who may complain about losing choices, the plan could offer a brokerage window. Transamerica’s plan offers a brokerage window.

Wood said to establish an MEP, there are three main steps:

  • Retain Employee Retirement Income Security Act (ERISA) counsel to establish the legal framework and governance; to establish a formal committee (A charter will define how the committee is established. Wood said it would be ideal to have a representative from all members of the MEP.); and to discuss the plan document (Wisconsin is using Transamerica’s volume submitter pre-approved 403(b) plan, which is one plan document, but each member can have a different participation agreement to offer different features, such as vesting schedules, eligibility criteria or other features.)
  • Retain a 3(38) investment fiduciary to assist in searches for administration and recordkeeping providers, establish investment criteria, execute an investment policy statement (IPS), select the plan-level investment lineup and establish ongoing monitoring and review procedures and meetings.
  • Retain a recordkeeper. Wood said it is important to have one that has experience with MEPs and is able to handle multiple entities and situations such as when one plan participant moves to another entity.

Wood told conference attendees Transamerica is working on another 403(b) MEP right now for a state hospital association. “MEPs can provide the same benefits for the health care industry,” he said. In addition, he told attendees, “Any kind of not-for-profits that are decentralized and small could work together to use this model. For example, United Way.”

A similar plan model has been in place for years for public K-12 plan sponsors—the Wise Choice for Educators Combined 457(b)/403(b) Plan—a co-operative built by the Illinois Public Pension Fund Association (IPPFA).
Benefits May 3, 2018

HSA Plan Sponsor Recipe for Success

Sara Caddy, benefits manager at Dimensional Fund Advisors, which won an Eddy Award for HSA usage, overall participation and communication strategy, shared its recipe for success.

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Plan sponsors tend to have trouble engaging participants in health savings accounts (HSAs)—educating them, getting them to participate and seeing HSAs as savings vehicles for retirement.

Karin Rettger, president, Principal Resource Group, told attendees of the Plan Sponsor Council of America’s 71st Annual National Conference that there are two drivers for offering high-deductible health plans (HDHPs) paired with an HSA: reducing health plan costs and helping participants with retirement health care costs. On the positive side, she said, HDHPs cost 10% to 15% less than lower-deductible plans, and medical trends are lower in HDHPs. “They empower employees to be consumers, and shopping around for lower prices saves both the employee and employer money,” she stated.

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On the negative side, according to Rettger, some employees live paycheck-to-paycheck and are not prepared for higher deductibles and higher out-of-pocket costs. They fail to enroll in HSAs due to a lack of education, confusion or apathy.

For funding retirement, Rettger pointed out that HSAs offer triple tax advantages: funds are contributed pre-tax, grow tax-deferred and withdrawals used for qualified medical expenses are tax-free. She noted that HSAs get FICA tax relief too, saving both the employee and employer money.

“If you save $3,450 per year—the current maximum for single-coverage—in an HSA over 25 years, assuming a 5% rate of return, you would have $170,000,” Rettger said.

Sara Caddy, benefits manager at Dimensional Fund Advisors (DFA), which won an Eddy Award, along with its provider HealthSavings Administrators, for HSA usage, overall participation and communication strategy, shared its recipe for success.

She said DFA’s approach to investing and client goals for retirement include:

  • Reduce tax liability,
  • Continually inform and educate clients,
  • Diversify and maintain investment strategy, and
  • Change relationship with HSA from a transactional one to a part of a retirement savings strategy. Caddy said when DFA did this, light bulbs went off for employees. It has been a big help in getting staff to move from DFA’s Preferred Provider Organization (PPO) plan to its HDHP.

“Before you come up with a great HSA strategy, you have to have a good health benefits strategy,” Caddy said. “Offer multiple health plan options, incentives to participate in a wellness program, and establish an employer contribution strategy.”

DFA offers a PPO and an HDHP with mirror networks and benefits. Premiums for the HDHP are less than for the PPO and DFA offers a discount on health insurance premiums for participation in its wellness program. Rettger added that the pricing structure has to be correct; plan sponsors shouldn’t leave that up to the insurance company. “Make the spread between options meaningful so the employee feels the financial reward of choosing the HDHP,” she said.

DFA also contributes to its HSA half of the HDHP deductible to promote participation. “Employees say this is a big reason they participate in the HDHP. We do not require them to contribute to get the employer contribution, but others could do a match to promote savings from employees,” Caddy said. She pointed out to conference attendees that what employers put in reduces the amount employees can put in—the limit is a total limit for employee plus employer contributions.

Rettger added that when employers question finding the budget for employer contributions, they need to remember their FICA savings and health care premiums savings. Also, for an employer that used to offer a retiree health plan and no longer does, HSA contributions can be a cheaper alternative to a retiree health plan.

According to Rettger, common matching formulas include a set amount based on the tier of coverage—i.e. single, employee +1 or family—and a set amount based on a percent of the deductible. She added that timing is important, front-loading an HSA encourages participation, but most plan sponsors contribute quarterly because once an employee terminates, it’s their money.

Caddy said DFA introduced a patient advocacy service to assist employees in shopping for medical services and to provide medical cost transparency. “We have saved our employees $1.2 million since 2011,” she noted.

DFA also found an HSA carrier that promotes first-dollar investing, which has driven home the concept and practice of making the HSA part of a retirement strategy. Caddy explained that many carriers wait until an employee has a certain balance to allow investing of HSA assets.

DFA provides HSA education upon hire, which is followed up with an email to reiterate talking points. Employees also get HSA education during open enrollment staff-wide meetings, during set office hours where people can come in and discuss the HSA one-on-one and during small group meetings. “Any time retirement is discussed, HSAs come up as well,” Caddy noted.

Part of the education focuses on consumerism: A doctor may refer an employee to a certain place for an MRI, for example, but DFA reminds employees they can contact the patient advocate to see if there is a cheaper place to get it done; a doctor may prescribe a brand name medication, but employees are reminded they can use a generic version.

In education, DFA reiterates what employees can use HSA funds for—COBRA premiums, long-term care insurance premiums, Medicate premiums, or for “just-in-case” expenses. Rettger added that for education about getting tax-free income in retirement, a powerful strategy employees can use is to pay out-of-pocket costs now, save the receipts and when the employee retires, he or she can turn them in to get reimbursed for health care expenses.

Rettger said DFA often details for participants worst-case scenarios by comparing PPO and HDHP cost implications. “HDHPs always get a bad rap, but if designed right, they can be less expensive than PPOs,” she said, showing an example of how HDHP premiums plus maximum out-of-pocket costs less employer contributions in an HSA could be less than premiums plus out-of-pocket costs in a PPO.

Currently 87% of DFA employees are enrolled in its HDHP.

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