With Limited Resources, Managing 403(b) Plans in Higher Ed Brings Unique Challenges

In the world of higher education, managing a retirement plan is no easy feat, as plan sponsors are tasked with overseeing large numbers of employees with diverse backgrounds and unique financial needs.

Full-time higher education employees typically have access to both a primary and supplemental workplace retirement plan—the primary used for employer contributions and the secondary for voluntary employee contributions, which is often a 403(b) plan.

While 403(b)s have many tax advantages, experts say 403(b) plan sponsors are slower to adopt features like automatic enrollment and automatic escalation, which are more commonplace in 401(k) plans.

Unique Challenges

Laura Gaynor, senior vice president at Transamerica, explains that higher education retirement plans—and 403(b) plans in general—tend to lag behind corporate institutions when it comes to adopting new features like automatic enrollment and automatic escalation, which have become popular with 401(k) plans.

“I would generally say their strategy in a lot of ways is [keeping with the] status quo,” Gaynor says. “It’s not just with automatic enrollment, but I see it with any types of new types of provisions or even different services products that are out there. So, again, they really lag a little bit behind, I would say, five to seven years behind corporate types of organizations.”

A recent Transamerica report found that more than half of 99 institutions surveyed said they did not automatically enroll employees in their retirement plans. And for those that did use automatic enrollment, Transamerica found that they generally took a conservative approach, as 57% said they only automatically enrolled employees at 1% to 3% of pay.

In addition, only 25% of institutions said they re-enroll opt-outs annually.

Another challenge that Gaynor identified is that higher education institutions operate in different semesters, and as a result, faculty and staff members tend to only be on campus for certain time periods. Institutions also hire a lot of part-time employees, such as adjunct professors, and it may be difficult to track eligibility for the retirement plan with those kinds of employee populations.

“How do you deal with the data that’s coming in? How do you get [employees] re-enrolled?” Gaynor says. “I think that in general is another challenge, not one that can’t be overcome, but I think that’s a little bit different than what you would see within the corporate types of entities.”

Gaynor adds that many institutions also offer set employer contributions and do not require employees to contribute to a plan to receive those funds. She says this often causes participants to feel like they are saving enough for retirement because their employer is providing a contribution, but Gaynor argues that this likely does not allow for employees to build enough savings to retire.

“A … challenge that we see is that these higher education institutions don’t really have the data to understand or to show the faculty and staff that [the] employer contribution is not going to be enough to allow you to retire,” Gaynor says.

HR staffs also tend to be small at higher education institutions, according to Gaynor, as they are also often the ones running the entire benefits department, payroll and the retirement plans.

Pooled Plans Provide Opportunity

Gaynor says pooled employer plans could be a “viable solution” for higher education plan sponsors, as PEP sponsors take on most of the fiduciary burden and spreads the administrative, compliance and cost burdens across multiple employers. As a result, this can alleviate a lot of the stress that individual sponsors may experience by managing their own plan.

However, Gaynor argues that in order for PEPs to take off in higher education, advisers need to become more comfortable with these sorts of plans.

“You don’t see a lot of higher education pooled plans out there,” Gaynor says. “But as they start [becoming] more commonplace and advisers [start] to get more education on them, they will then start bringing [PEPs] more to these higher education institutions, and I think you’ll start seeing a lot more adoption because it is a great solution.”

Eric Fulcomer, the president and CEO of the Wisconsin Association of Independent Colleges and Universities (WAICU), is an example of someone leading the way in offering a MEP to higher education employees.

WAICU represents the 22 private, nonprofit institutions of higher education in Wisconsin, and Fulcomer also serves as the president and CEO of the WAICU Benefits Consortium, the WAICU Educational Technology Consortium and the WAICU Multiple Employer Retirement Plan Collaboration.

WAICU’s Retirement Readiness Plan (WRRP) launched in the spring of 2018 and has continued to gain momentum, as nine institutions are currently part of the MEP. All WAICU-member colleges and universities are eligible to participate in the plan, and Fulcomer says it is a goal to have more WAICU institutions join the MEP in the future.

Within the MEP, Fulcomer explains that there are ERISA plans and non-ERISA plans because two of the participating institutions are part of church organizations, which have different federal regulations. The rest of the plans function in the MEP like traditional 403(b) plans.

Fulcomer previously served as the president of Rockford University, for more than six years, where the institution managed its own retirement plan. He says the benefit of the MEP arrangement at WAICU is that it takes some of the fiduciary responsibility away from the institutions’ boards and brings it collectively to the WRRP.

Every school that is a member the WRRP has a board member who participates in the retirement plan committee and helps make decisions about how the MEP operates.

“Because [investment and other] fees are based on how many millions of dollars you have invested, [and] because we are a larger plan [with] all of our schools coming together, we are able to negotiate lower fees, so our fees are lower than what an institution would be paying individually,” Fulcomer says. “That helps the participants because they keep more of their money, and it grows.”

Before the MEP was created, each school was offering its own plan and many used TIAA or Fidelity as their recordkeeper. The MEP is administered by Transamerica, so many had to make the transition to the new recordkeeper when they joined the MEP.

Implementing Auto Features

Fulcomer explains that WAICU provides a contribution to the participants’ retirement plan, regardless of whether the participant contributes or not, and that process is automatic. Employees can make contributions on top of what WAICU provides, but it is not required.

“I think one of the important things in the nonprofit space is that employees are the largest budget item,” Fulcomer. “So if you look at our budget, and our salary and benefits, that’s going to be the largest portion of expenses.”

As a result, he says it is difficult for institutions, like those in the WAICU MEP, to offer automatic enrollment and matching contributions, as there are budget constraints—especially when the employer is already providing a non-discretionary contribution.

“We have a lot of young employees right out of college who are not making very much money,” Fulcomer says. “Think about admissions counselors, people who work in residence life, assistant coaches… [these are] employees that are basically just starting out and making low wages and are probably less inclined to participate. It’s good for them to start [saving] early and get into the discipline of that, but I think maybe a reason schools choose not to automatically enroll everybody is understanding that people are just in different situations.”

David Swallow, senior managing director at TIAA, explains that many institutions require individuals, once they are hired, to contribute a certain amount of their pay to the retirement plan as a condition of taking the job. He says this is a particular phenomenon in the 403(b) market.

Swallow says TIAA is actively speaking with clients who do not have the mandatory contribution requirement about the benefits of auto-enrollment. According to Swallow, about 25% of TIAA’s larger clients offer auto-enrollment—not taking into account those that have a mandatory contribution.

“We strongly believe that automatic enrollment and auto-escalation are critical components to have within a retirement plan when you talk about retirement readiness,” Swallow says. “One thing that we’ve seen from measuring our clients who actually implement automatic enrollment, we typically see a 2% increase in participants’ retirement readiness [score]. But if a client has automatic enrollment and auto-escalation, we’re actually seeing about a 15% increase in their readiness.”

Swallow adds that TIAA has also increased its focus on helping institutions upgrade their, often antiquated, HR systems.

“A lot of institutions have used older systems, and we’re seeing a big shift within higher education towards using newer systems,” Swallow says. “That’s a big resource constraint on them when they go through a [human resources information system] transformation.”

He says upgrading the technology is a huge process that is often expensive and time-consuming, but he argues that the change can make a significant difference in helping plan sponsors track their participants and ultimately understand their financial needs.