OLYMPIA, Wash. - Lured by a bonus incentive that ends Dec. 31, teachers in Washington state could move as much as $200 million of their own contributions into the self-directed investment options of a new hybrid defined contribution plan set up by the Washington State Investment Board.
The new plan, TRS 3, was implemented July 1. All teachers hired after July 1 are or will be automatically enrolled in TRS 3, which combines a defined benefit plan floor for employer contributions with a participant-directed 401(a) plan for employee contributions. Existing employees can choose to remain in the defined benefit plan or move to TRS 3. Those who move before Dec. 31 will receive a bonus contribution from the state; the amount depends on the amount of the individual teacher's contributions.
Of the approximately $1.2 billion in the existing defined benefit plan, known as TRS 2 plan, about $200 million in teacher contributions is eligible to move into the defined contribution option.
Christopher Ailman, chief investment officer of the State Investment Board, said a trickle of assets already has begun to move. He said the plan's educational consultant, Educational Technologies Inc., expects a rush near the end of the year by teachers taking advantage of the bonus before its expiration.
The board hired State Street Global Advisors, Boston, to run the first externally managed options in the new hybrid plan.
State Street will offer six passive commingled funds, an unusual vehicle among public fund conversions to 401(k)-like plan designs. State officials said the choice was based on both cost and ease of understanding.
More asset classes, probably managed by outside managers, could be added this year.
Under the new plan, existing and future employer contributions to the teachers' retirement system will remain invested in the state's $29 billion defined benefit plan, which pools assets from several public employee retirement systems.
Employee contributions to the new 401(a) plan are now invested in a single investment option: a total allocation portfolio that invests in the state's huge defined benefit plan portfolio. The defined benefit plan option is monthly valued and is open for transfers in and out once a month. That portfolio will remain a monthly valued investment option, said Mr. Ailman, because of the impossibility of trying to price portfolio components, such as private placements, real estate and venture capital on a daily basis. The total allocation portfolio remains the default option for teachers who don't choose to direct their account assets.
After April 1, teachers will be able to direct their investments into six SSgA managed indexed commingled funds: a Standard & Poor's 500 fund, a Russell 3000 fund, a Russell 2000 fund, a bond fund based on the Lehman Brothers Bond Index, an international fund based on the Morgan Stanley Capital International Europe Australasia Far East index and a short-term fund. The external options are daily valued with unlimited transfers in and out.
The employee contributions are completely portable, like a corporate 401(k) plan, which was the main aim of Washington legislators when they created the alternative plan, said Mr. Ailman.
The Washington teacher's hybrid plan also is one of the first to make its internal defined benefit plan staff do double-duty in managing the managers and monitoring the investments of the defined contribution plan.
"The real difference in the Washington teacher's plan compared to other public plan conversions is that it uses the capabilities of the internal investment staff to help achieve the same low cost structure and high degree of portfolio management for the defined contribution plan as are used for the defined benefit plan," said Mr. Ailman.
Mr. Ailman said the board is deliberately emphasizing investment style and asset classes in its communications with employees, using generic terms to describe investment options, rather than focusing on individual managers or mutual funds.
"The investment staff at the state board needs to be able to change managers for DC plan options freely in order to provide the best possible managers for each asset class. Too much emphasis on a particular manager or fund, rather than the asset class, will only confuse employees if a change has to be made," he said.
"Unlike some other recent conversions of public defined benefit plans, the Washington State example is not an 'either/or' plan. Employer contributions will remain within the defined benefit plan portfolio. Employees can leave their own assets in the defined benefit plan portfolio or can direct them to outside managed funds. Under this hybrid plan, employees have complete portability of their own contributions, while employer contributions remain invested in the state's defined benefit plan. The structure was designed to be cost neutral to the employee and employer," Mr. Ailman said.
He said investment management staff will begin to brief the board at the end of February regarding possible new investment options for TRS 3. "We hope to start the board moving on the selection of new funds in a process that may take a couple of years. We're looking at perhaps putting together asset allocation funds . . . and possibly active equity management. We're still evaluating what styles we need to add and what vehicles," he said.