The new year will herald a dramatic change in the defined contribution plans at Purdue University.
Purdue, which has a 403(b) plan and a 457 plan with combined assets of $2.4 billion, is trimming the number of record keepers to one from five, and the number of investment options to 19 from a whopping 381.
The restructuring reflects a desire for administrative simplicity, lower expenses and greater clarity for participants, said Jim Almond, assistant vice president for business services and treasurer of the university, based in West Lafayette, Ind.
“We wanted to change the model to be more efficient,” he said. Under the current system, “there was a lot of duplication among investment options and varying levels of expenses. It just added to the confusion.”
The new system will offer four tiers of investments: a target-date series from Vanguard Group Inc, which is the default option; several Vanguard index funds; a mixture of active funds from several providers; and the Fidelity Investments BrokerageLink self-directed brokerage window.
“As an outsider looking in, I applaud Purdue's efforts,” said Marina Edwards, a Chicago-based consultant for Towers Watson & Co. (Purdue is not a Towers Watson client.) “Consolidation will help them to support their fiduciary responsibility and it will help their participants.”
Although the restructuring was the product of a lengthy review by a task force of faculty and staff and the hiring of investment consultant Hewitt EnnisKnupp, the consolidation also reflected the university's response to Internal Revenue Service regulations that have spurred other 403(b) sponsors to consolidate record keeping and investment options, Mr. Almond said.
The IRS rules were issued in 2007, and most took effect last year. Key provisions include requiring sponsors to have a written plan document and to closely monitor employee loans and hardship withdrawals, said Kevin Vandolder, a principal at Hewitt EnnisKnupp, Chicago.
“The IRS regulations encouraged 403(b) sponsors to increase their fiduciary reviews,” said Mr. Vandolder, who declined to discuss his firm's work with Purdue. “Fiduciary responsibilities in the 403(b) space will look very similar to the 401(k) space.”
Most 403(b) plan sponsors are now subject to Form 5500 reporting requirements from the Labor Department, which means the sponsors will “generally be required to have their financial statements audited by an independent auditor,” according to a TIAA-CREF analysis in January of regulatory changes affecting 403(b) sponsors.
With all of those extra regulatory requirements, “I don't see anything on the horizon stopping this trend” of vendor consolidation and investment option reduction,said Tom Modestino, associate director at Cerulli Associates, Boston. “There's a big burden to track all these investment and relationships, so to narrow down the investment options makes for simplicity sense and administrative sense.”
Purdue's move to restructure began with the idea of negotiating lower fees, Mr. Almond said. The biggest challenge was whether Purdue could satisfy the investment demands of its constituents — about 7,500 active participants and 7,500 retirees — and meet its goal of having one record keeper.
Fidelity Investments, one of five incumbent record keepers, was the unanimous choice of the task force, besting two other finalists - TIAA-CREF, also an incumbent, and Aon Hewitt. The other incumbents are VALIC, Lincoln Financial Group and American Century Investments.
“We wanted a firm that could manage the size and scope of our program as a single record keeper,” Mr. Almond said.
As part of the negotiations, Fidelity officials agreed to set up an office on Purdue's main campus and send representatives to the three regional campuses.
Fidelity also agreed to the task force's request that Fidelity products be available only through the self-directed brokerage window tier.
According to a recent Fidelity report, a first-quarter 2010 review of 20 tax-exempt organizations showed “redundancy of investment options and inconsistencies in messaging to participants are reduced” when the number of record keepers is reduced.
Plans using a single record keeper“are able to take full advantage of auto-enrollment and auto-increase programs” to improve employee participation rates and savings rates, the report said. “Consolidation has been shown consistently to deliver administrative savings for plan sponsors and simpler plan interactions for participants.”