University of California slashes fees in revamp of 3 DC plans

The University of California system has engineered a major restructuring of its three defined contribution plans aimed at cutting fees and simplifying investment choices for 43,000 participants investing a total of about $17.5 billion.

The restructuring eliminated all 128 retail-priced mutual funds, reducing the number of investment options by 63%. That move saved on fees and helped to reduce participants' confusion over multiple investment options, said William Ryan, director of client relations services in the office of the chief investment officer of the regents at the Oakland-based university system.

Having so many choices was “unwieldy for us,” said Mr. Ryan. “We wanted to get the best prices and remove redundant investments,” he said.

The menu changes were the same for the university's 403(b), 457(b) and 401(a) plans, for which Fidelity Investments is record keeper and Aon Hewitt is investment consultant. The university's defined benefit plan, with assets of $47 billion, was unaffected by the changes to the DC plans.

Before the restructuring, the DC investment lineups had:

• a customized target-date series and 13 stand-alone core funds that accounted for 74.7% of aggregate assets;
• a group of 62 institutional-share funds, 14.2% of assets;
• the retail-priced funds, 10.9% of assets; and
• a self-directed brokerage account, 0.3% of assets.

After the restructuring, the lineup is:

• the customized target-date series and 14 stand-alone core funds, representing 81.7% of assets;
• the 62 institutional share price funds, 16.3% of assets; and
• the self-directed brokerage account, representing 2% of assets.

Mr. Ryan said the university isn't finished with its investment menu restructuring. Officials are looking at cutting some of the 62 institutional-share price funds because there are still too many choices. He doesn't have a specific number in mind. He expects a decision will come later this year, with implementation in 2015.

Although university officials haven't calculated an aggregate savings in investment fees, Mr. Ryan said the retail share-class mutual fund fees ranged from of 10 basis points to 103 basis points, with an average of 65 basis points.

By contrast, fees for the 62 non-core institutional-share funds range from five basis points to 81 basis points, with an average of 52 basis points.

Each fund in the target-date series, called UC Pathway Funds, has an expense ratio of 15 basis points or less. Each is a fund of funds using many of the university's stand-alone core funds. The target-date series is managed internally.

Nine of the core funds are internally managed, and each of those has an expense ratio of 15 basis points or less. The core funds include: short-term fixed income; stable value, short duration Treasury inflation protected securities (two to three years); longer duration TIPS (seven to eight years); intermediate bonds; balanced (74% equity/26% fixed income); international equities; large-cap blend similar to the Russell 3000; and large cap blend equity fund that includes a 5% allocation to private equity. The fixed-income funds are actively managed; the equity funds are passively managed. Each is a separate account.

The other five core funds are institutional share-class mutual funds, with fees ranging from six basis points to 61 basis points: Vanguard Small Cap Index fund; Vanguard REIT Index fund; Dimensional Fund Advisors Emerging Markets Portfolio fund; Vanguard FTSE Social Index fund; and Dreyfus Treasury Prime Cash Management Fund.

When the retail shares were dropped, the university also re-enrolled all participants who had invested in these shares. If they didn't make a choice, their money was moved to a target-date fund with a date closest to their 65th birthday.

After re-enrollment, 60% of the $1.79 billion in the retail-price shares were moved into in the target-date funds, Mr. Ryan said. About 20.5% were transferred to the stand-alone core funds and the non-core institutional-share funds, while 19.5% went to the self-directed brokerage account.

Mr. Ryan said the re-enrollment produced two surprises: little negative feedback from participants; and a lots of participants actively transferring their accounts.

“Forty percent made an active decision,” Mr. Ryan said. “We had estimated it would be only 10% based on other plans' experiences. We felt the re-enrollment was successful. We were able to mobilize this group.”

As for feedback, Mr. Ryan said Fidelity received approximately 55,000 calls from participants, reporting that “maybe less than 100 were against” the re-enrollment.

Mr. Ryan attributed the muted negative response to a six-month education campaign. “We learned that engagement with participants early and often was a benefit for us,” he said. “We had a consistent message. There were multiple points of contact.”