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January 09, 2012 12:00 AM

University of Missouri to introduce hybrid retirement plan

New retirement plan for new employees part of school's effort to control volatility

Robert Steyer
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    Guarding: Betsy Rodriguez said the new hybrid plan would share the risk between the university and its employees.

    The University of Missouri System is creating a hybrid retirement plan, combining defined benefit and defined contribution components, for employees hired starting Oct. 1, 2012.

    University officials said the decision to close the existing $2.5 billion fund to new participants and create a hybrid was made to establish a long-term strategy for the still-healthy defined benefit plan to guard against problems that have afflicted other public pension plans.

    “We are not immune to changes in the economy,” said Betsy Rodriguez, Columbia-based vice president of human resources at the University of Missouri System.

    The decision doesn't change the terms of the current defined benefit plan for faculty members and staff.

    Within the new hybrid, the DB component will have several features identical to the existing plan. The vesting period for both is five years. Annual employee contributions — 1% of pay per year up to $50,000 and 2% over $50,000 — is the same for both.

    The hybrid DB component will be held in the same trust and managed with the current DB plan assets, which are run internally. The asset allocation for the current DB plan is 37% global equity; 15% global fixed income; 15% Treasury inflation-protected securities; 12% high-yield fixed income/bank loans; 6% real estate; 5% absolute-return strategies; 5% private equity; and 5% emerging markets debt.

    The differences involve the university's annual budgeted contribution (7.25% of an employee's pay for the existing plan and 3.21% for the hybrid plan) and the multiplier used to determine a participant's benefits.

    The hybrid's DC component includes an automatic annual contribution by the university of 2% of a participant's pay. The university also will match — dollar for dollar — a participant's contribution up to an additional 3% of pay.

    The university's contributions will be put into the 401(a) plan while employee contributions probably will be made to a 457(b) plan, although a final decision hasn't been made, Ms. Rodriguez said.

    “The goal was to keep the price of the plan about the same,” Ms. Rodriguez said. “We will spend slightly more (for the hybrid), but there will be less volatility over time.”

    Examples studied

    University officials had discussed requiring new employees to enroll in a DC-only plan, but the hybrid was chosen, in part, because it “shared the risk” between the university and the employees, Ms. Rodriguez said. The university studied examples of peers that had introduced DC-only plans for new employees, but officials concluded that this approach would have cost more than the hybrid in the long run and “wasn't the best fit” for the university's overall benefits strategy, she added.

    The hybrid pension plan will be introduced at the same time the university offers a restructured defined contribution program affecting two 403(b) plans, one 401(a) plan and one 457(b) plan with combined assets of $830 million.

    “We had been considering a 403(b) plan consolidation for five to seven years, so it made sense” to implement the hybrid pension plan and the DC program changes at the same time, Ms. Rodriguez said. The board of curators — the university's governing body — approved the hybrid plan in October and the DC consolidation in December.

    The restructuring will reduce the number of 403(b) plan record keepers to one from 10, and it will lower the number of investment options to about 20 from 872.

    Fidelity Investments, Boston, one of the 10 incumbent 403(b) providers, will be the sole record keeper under the new system. Fidelity also will continue as sole record keeper for the existing 457(b) and 401(a) plans, and it will be the sole administrator for the DC component in the hybrid.

    The other current 403(b) providers are American Century, Franklin Templeton, Jackson National Life Insurance Co., MetLife Inc., T. Rowe Price, TIAA-CREF, Vanguard Group Inc., VALIC and Waddell & Reed Inc.

    The university hasn't decided on a precise investment lineup yet. It will feature three tiers, including a target-date fund series and a group of 15 to 20 core investment funds. The third tier will be a self-directed brokerage window providing access to 7,500 mutual funds from more than 500 mutual fund companies.

    University officials began work in 2009 on the design that eventually became the hybrid plan, but had periodically commissioned studies over 10 years to determine whether the DB plan should be modified.

    “They were in a position to take a real, sobering long-term look,” said Howard Rog, senior vice president and actuary at Segal Co., New York, which has been the university's retirement consultant for 15 years. “They weren't in crisis mode.”

    From Oct. 1, 2004, through Sept. 20, 2010, the plan's the funding ratio hovered between 93.6% and 103.8%, according to information the university provides on its website for participants. The funding ratio was 96.3% for the plan year that started Oct. 1, 2010, according to data provided by Kelley Stuck, the university's associate vice president for total awards. More recent information is not yet available.

    Mr. Rog said the university has adhered to its contribution plan in the best and worst of times. “Even when they were 100% funded they were still consistently making contributions according to their actuarially required contribution policy,” he said.

    Supplemental plans

    The University of Missouri System's overall retirement plan design is different from many of its peers, which use 403(b) and other defined contribution plans as primary sources of retirement for faculty members, Mr. Rog said. At the University of Missouri, the 403(b) plans and other DC plans supplement the defined benefit plan and Social Security. Also, at other higher education institutions, the pension plans are often state-administered plans.

    Although the University of Missouri receives state appropriations for about 30% of its budget, there is no designated amount or percentage of the funds for pensions or benefits, Ms. Rodriguez said. Pension decisions are made by the university's board of curators.

    The DB plan uses a 20-year amortization method to determine the annual required contribution. The plan uses an assumed 8% annual rate of return, although Ms. Rodriguez said the board of curators will review that assumption in April.

    Over the years, the board of curators has taken several steps to strengthen the DB plan, Ms. Rodriguez said. In 2009, for example, the university began requiring employees to contribute a percentage of pay to support the fund of the plan.

    During the 2008 fiscal year, the university created a stabilization fund to further ease the impact of retirement-plan cost volatility on the university's budget. In years that the required university contribution is less than a specified percentage of the budget, the difference is placed in the stabilization fund. When the required contributions are greater than the specified percentage, the extra amount can be taken from this fund.

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