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Marco Merz and Arthur Guimaraes, University of California

2 from University of California get a hand from IRS in quest to reduce fees

Marco Merz, left, and Arthur Guimaraes got a ruling from the IRS to start collective trusts.

In a sweeping series of plan design changes, the University of California, Oakland, cut fees by about 25%, simplified investment lineups for its three defined contribution plans and used a rare investment strategy to help achieve some of its goals.

This comprehensive approach earned an Innovation Award for Marco Merz, director of defined contribution, Office of the Chief Investment Officer, Board of Regents, and Arthur Guimaraes, chief operating officer.

"It is an excellent restructuring of the investments," one judge wrote of university's changes to its 403(b) plan, 457(b) plan and 401(a) plan with aggregate assets of $25 billion covering 310,000 participants. "It was very well implemented."

The changes led to an annual reduction of fees by $6 million, Mr. Merz said.

Plan officials started thinking about making plan improvements 2 years ago, deciding to implement the changes all at once rather than piecemeal. "By parceling them out, we would have had change fatigue" among participants, Mr. Merz said. "This way we didn't have to make communications three or four times."

Plan executives needed extensive communications just to get the OK for the changes, including the regents board, the office of the president, the university's academic council, employee unions and advisory boards.

Mr. Merz said actions to simplify the investment lineup and cut fees were related, as the university trimmed redundant funds and established white label funds to create "a more intuitive naming convention."

Although the university changed names of funds, "it didn't affect the strategy," he said. "It was the same manager. It was the same strategy."

This policy held true for the conversion of two funds into collective investment trusts for the university's 403(b) plan, an extremely rare strategy for higher education 403(b) plans.

The university converted the Fidelity Growth Company Fund, an institutionally priced mutual fund, to a collective trust called the UC Growth Company Fund. It also converted the Fidelity Diversified International Fund, an institutionally priced mutual fund, to a collective trust called UC Diversified International Fund.

Collective investment trusts are permitted for most DC plans, such as 401(k), 457(b), 401(a) and church-sponsored 403(b) plans. However, colleges, universities, hospitals and public school systems are prohibited by federal law from offering these options, which DC plans use to reduce costs.

To offer the collective trusts, the university received a private letter ruling from the Internal Revenue Service acknowledging it could proceed.

"We are a governmental 403(b) plan launched in 1968 and therefore grandfathered as it pertains to certain (federal) Code Section 403(b) provisions," Mr. Merz said. The investment lineups for each of the university's DC plans are identical, so the 457(b) and 401(a) plans are using collective trusts, too.

Although the university's special circumstances for collective investment trusts won't create a precedent for other 403(b) plans," this might encourage future federal legislation to allow a broader use of investment options for other 403(b) plans," one judge wrote.

"Participants should be positively impacted by lower fees, and an improved, easy to understand investment lineup," the judge added.