At Glens Falls Hospital, replacing virtually the entire investment lineup of its 403(b) plan was only part of the overhaul engineered by executives as they tried to increase diversification, reduce overlap, cut costs and improve plan design.
The hospital acted because improving the retirement savings plan will “help attract and retain talent,” said Kyle Brock, vice president of human resources for the hospital in Glens Falls, N.Y., whose 403(b) plan serves 2,300 participants.
The new investment lineup, which took effect in December, is the latest in a series of steps taken by executives of the $170 million Glens Falls Hospital Partnership Plan.
The changes began in November 2015, when the plan outsourced and automated its administration; previously documents were processed manually by the human resources department. At the same time, the plan started auto enrollment and auto escalation.
Subsequently, plan executives added a target-date series as a qualified default investment alternative, negotiated lower fees on investment options, cut plan administration costs and changed record keepers.
“We rebuilt the plan from the ground up,” Mr. Brock said. “We looked at the plan from an investment, policy and benefit standpoint.”
When comparing Glens Falls with other clients, “these changes may have been a bit more than normal,” said Kevin Murray, the plan's consultant and a Wellesley, Mass.-based director of Cammack Retirement Group. “However, we had the perfect storm” of plan improvements, he said.
Unlike many 403(b) plans that have reduced the number of investment options, the Glens Falls plan has a few more choices — 22 vs. 19 — than previously. Executives removed some investment overlap, added six asset categories to improve diversification and added the target-date fund portfolio.
Both the new and old lineups offered funds from multiple providers with a mixture of passive and active investments.
The new lineup has overall lower investment fees, but Mr. Murray didn't provide an aggregate number.
Investment lineup changes
One example of a fee cut is the Black Rock High Yield Bond Fund, the only holdover fund. Participants now pay 60 basis points for the fund's institutional shares vs. the 93 basis points they previously paid for investor-class shares, Mr. Murray said.
And when plan executives reconsidered an S&P 500 index fund, they chose Fidelity Investments institutional shares at 3.5 basis points, replacing a Vanguard Admiral shares fund that charged 5 basis points, he said. (The only other holdover from the old lineup is a self-directed brokerage account through Charles Schwab & Co.)
Changing the investment lineup coincided with VALIC taking over from Transamerica Retirement Solutions as record keeper in December 2016. Initially, the new record-keeping contract will trim $85,000 in administrative costs, Mr. Murray said. “This (savings) figure is expected to grow as asset levels increase and further administrative savings” are realized in the future, he said.
Some of the plan's changes — such as adding automatic enrollment and auto escalation — took place when Transamerica was the record keeper. The hospital issued an RFP for a new vendor last year as part of a “best practices review” that the plan conducts every three to five years, Mr. Brock said.
“ VALIC was a better fit for our employees,” said Mr. Brock. The VALIC website was easier to navigate, and VALIC provided better communication and education services, he said.
“Evolving. Change Is Good” was the theme of the hospital's campaign to educate participants about the record keeper transition and new investment menu. In a detailed brochure, the hospital played up the lower administrative costs, a personalized retirement readiness report for each participant and the availability of VALIC advisers on-site for one-on-one appointments during the transition and afterward.
The brochure featured a detailed explanation of fund mapping as well as a comprehensive outline of the new investment options, performance, benchmarks and fees. VALIC conducted more than 20 on-site group meetings and held more than 150 individual counseling sessions, Mr. Murray said.
Some employees were concerned about the changes because they were unfamiliar with VALIC and “hadn't been through a transition in a long time,” said Mr. Brock. “The concerns were about the process and timing. People were satisfied when we explained what we were doing.”
The plan's initial deferral for auto enrollment is 2% of annual salary, and the deferral can be increased one percentage point a year up to a total of 4%. Participants can opt out. The plan provides a match of $1 for each $1 of pay contributed up to 4%.
Mr. Brock said the current participation rate is 90%. Before auto enrollment, the participation rate was 70% to 80%. Plan executives have not set a specific participation rate goal, but “we are very happy with the increase in participation we have seen with the changes,” Mr. Brock said.
Although more 403(b) plans have adopted auto enrollment in recent years, they still lag 401(k) plans, said Aaron Friedman, national tax-exempt practice leader at Principal Financial Group, which collaborates with the Plan Sponsor Council of America on an annual survey of 403(b) plans.
For 403(b) plans with 1,000 or more participants, the auto-enrollment adoption rate was 30.8% in the latest survey, said Mr. Friedman, whose firm isn't involved with the Glens Falls 403(b) plan. For smaller plans, the auto-enrollment rate was 25.5%.
However, when PSCA and Principal looked at hospital 403(b) plans, they found that 61.5% offered auto-enrollment. “They have really embraced this because they have the structure and governance in place,” he said.
Mr. Friedman added that 403(b) plans with more than 1,000 participants have flocked to target-date funds with 78.7% offering these options. “Target-date funds are a very easy way” to achieve diversification and counteract participants' confusion or inertia about asset allocation.
At year-end 2016 — with about one-month's inflows to review — the new target-date funds accounted for $4.1 million, or about 2.4% of Glens Falls' total plan assets. Large-cap domestic equity funds with a total of $70.7 million, or 42%, represent the largest allocation, followed by stable value with $34 million, or 20% of total plan assets.
This article originally appeared in the April 17, 2017 print issue as, "Hospital prescribed makeover for its 403(b)".