Plan Design Trends in Higher Education  Work on the front allows participants to stop working at the end                ©2...
Erik Daley, CFAErik is the Managing Principal for Multnomah Group. He is a member ofMultnomah Group’s Investment Committee...
Agenda•   Compensation Model in Higher Education•   Defined Benefit to Defined Contribution Transition Impacts•   Defined ...
Compensation Model in Higher EducationOn average, 75% of the costs to run a college are related to personnelexpenses    • ...
Compensation Model in Higher Education$120,000.00                                                                         ...
Change in Model for Retirement Savings    Defined Benefit Plans                                                     Define...
Impact of the TransitionEmployees whose primary retirement plan is a DC plan tend to retire one to twoyears later, than em...
Lifecycle of a Defined Contribution Plan                                                                                  ...
Designing the Best Defined Contribution PlanPlan Forward1. Benefit Plan Design2. Plan Provider Services3. Participant Educ...
Benefit Plan DesignHigher education is damaged by their high employer contribution rates todefined contribution plans     ...
Benefit Plan Design – Young Savers                                Pre-Retirees               AccumulatorsYoung Savers     ...
Benefit Plan Design – Young Savers                 Employee Mandatory                Automatic Enrollment and           Ad...
Higher Education Lags Behind Other Industries inUsage of Automated Plan Features1                                         ...
Automatic Enrollment Works          The Impact of Automatic Enrollment on Participation Rates                            i...
Benefit Plan Design – Accumulators                                Pre-Retirees               AccumulatorsYoung Savers     ...
Retirement LeakageOnly 20% of employees who take a lump-sum distribution roll proceeds into atax-qualified IRA or retireme...
Defined Contribution Plan Participants’ Activities(2006-11)                                                 2006         2...
Benefit Plan Design – Pre-Retirees                                Pre-Retirees               AccumulatorsYoung Savers     ...
In-Service Plan DistributionsPlans routinely provide older employees (59 ½ - 65) the ability to begin takingdistributions ...
Plan Services                                                           Participant Type                                 H...
Investors Fail to Track the MarketAnnualized Returns for the 20 Years Ended 12/31/201010.00%                              ...
“Easy” Investment Structures            Managed Account                   Target Maturity                      Target Risk...
Investment Returns Cannot Fix Savings Problems5 Year Annualized Returns (Period Ending 12/31/2010) Percentile             ...
Education has Limits“…policy makers should be very concerned that retirement education does notincrease the likelihood tha...
Employee Education TipsDuring Enrollment1. Focus education on financial literacy and savings behaviors2. Deemphasize the i...
Pre-Retiree NeedsViewing the participant as a whole1. Bringing retirement plan projections to a fine point     •   Externa...
The Optimal Higher Education Plan Design       Easy to       Start        1. Automatic Enrollment           and investment...
Five Steps to Improving Your Plan and YourInstitution1. Evaluate the Current Retirement   Readiness of Your Institution as...
DisclosuresMultnomah Group, Inc. is an Oregon corporation and SEC registered investmentadviser.Investment performance and ...
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Plan Design Trends in Higher Education

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  • The trend since the 1960s has been toward occupational or vocational degrees.
  • 70% of Public Plans and 40% of Private Plans have a Mandatory Employee Contribution
  • 70% of Public Plans and 40% of Private Plans have a Mandatory Employee Contribution
  • Fidelity Survey of participants indicated 29% would not do so again
  • 70% of Public Plans and 40% of Private Plans have a Mandatory Employee Contribution
  • Plan Design Trends in Higher Education

    1. 1. Plan Design Trends in Higher Education Work on the front allows participants to stop working at the end ©2003 – 2013 Multnomah Group, Inc. All Rights Reserved.
    2. 2. Erik Daley, CFAErik is the Managing Principal for Multnomah Group. He is a member ofMultnomah Group’s Investment Committee and leads the firm’s tax-exemptpractice, focusing on higher education and healthcare organizations. Erikconsults regularly with clients on a variety of retirement plan related topics tohelp manage their fiduciary risks. He is a national speaker on retirement planissues.Prior to founding the Multnomah Group in 2003, Erik served as a VicePresident of Retirement Services and led the Portland, OR practice of anational retirement services firm. In that position Erik was a founding memberof the firm’s national Investment Committee and had oversight for businessdevelopment in the western United States.Erik is a member of the CFA Institute, the CFA Society of Portland, the CFASociety of Seattle, the American Society of Pension Professionals andActuaries, the Portland Chapter of the Western Pension & Benefits Council,and the Society for Human Resource Management. Erik holds a B.B.A. fromthe University of Iowa.2 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    3. 3. Agenda• Compensation Model in Higher Education• Defined Benefit to Defined Contribution Transition Impacts• Defined Contribution Plan Lifecycle• Plan Design • Young Savers • Accumulators • Pre-Retirees• Plan Services• Investment Structures• Employee Education Needs• 5 Steps to Creating a True Retirement Plan3 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    4. 4. Compensation Model in Higher EducationOn average, 75% of the costs to run a college are related to personnelexpenses • A significant portion of that cost is attributable to benefits - Retirement - HealthFaculty salaries are especially expensive • Business • EngineeringCosts go beyond direct compensation and benefits • Paid time off for research • Graduate assistants to support research • Equipment and facilities to attract talentTenure • Shifting faculty needs • Increasing labor cost4 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    5. 5. Compensation Model in Higher Education$120,000.00 $113,176$100,000.00 $78,565 $80,000.00 $66,564 $60,000.00 $47,847 $40,000.00 $20,000.00 $0.00 Instructors Assistant Professors Associate Professors Full ProfessorsThe American Association of University Professors. Salaries are adjusted to a nine-month work year. 2011-2012academic year. Excludes cost of benefits and other non-compensation costs.5 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    6. 6. Change in Model for Retirement Savings Defined Benefit Plans Defined Contribution Plans 85% Retirement Readiness1 51% Retirement Readiness1 Primarily employer funded, with Mix of employer and employee occasional required participant Funding contributions contributions Employer directed Investment Strategy Participant directed Participants determine how much income Participants focus on generating a sum of they need to replace and work to the goal Evaluation Metric assets that will become the source of of achieving that level of benefit meeting retirement expenses High Plan Sponsor Volatility Low Participants are protected against Each participant must individually ensure investment and longevity risk Participant “Safety” their retirement preparedness 1National Institute on Retirement Security. Retirement Readiness – What Difference Does a Pension Make?6 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    7. 7. Impact of the TransitionEmployees whose primary retirement plan is a DC plan tend to retire one to twoyears later, than employees covered by a pension plan Center for Retirement Research, “The Recent Trend Towards Later Retirement,” March 2007Individuals covered only by a DB plan are 87% more likely to retire in any givenyear that individuals only covered by a DC plan. Rui Yao and Eric Park, University of Missouri, “Do Market Returns Affect Retirement Timing?” 2011A 1% increase in the S&P 500 Index in any given year increases the probabilitythat the pre-retiree will retire by 2.5% Rui Yao and Eric Park, University of Missouri, “Do Market Returns Affect Retirement Timing?” 2011Delayed retirements may also increase employers’ healthcare costs.Healthcare costs for a 65-year-old worker are twice those of a worker betweenthe ages of 45 and 54 U.S. Department of Health and Human Services, “National Health Care Expenditure Sheet.” Data as of 2004The ability to retain young talent is impacted by the prospect of career andprofessional advancement7 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    8. 8. Lifecycle of a Defined Contribution Plan •Accomplished •Young •Mid career •Experienced •Lower income •Highly •Concluded Young Savers •Direct Accumulators productive Pre-Retirees costs of competition for •Financially establishing a earned income secure family / life1. Begin the retirement savings 1. Demonstrate the progress 1. Provide extensive access to process towards retirement readiness financial planning and advice2. Reward engagement and 2. Reduce the impact of leakage on 2. Focus on retirement plan as a tool patience retirement readiness for securing retirement rather than3. Affirm the commitment to 3. Begin educating on what a wealth accumulation instrument beginning the savings process retirement is 3. Identify opportunities to incent retirement8 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    9. 9. Designing the Best Defined Contribution PlanPlan Forward1. Benefit Plan Design2. Plan Provider Services3. Participant Education9 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    10. 10. Benefit Plan DesignHigher education is damaged by their high employer contribution rates todefined contribution plans Distribution of Mandatory Employer Core Contributions1 40% 35% 35% 30% 31% 25% 27% 20% Public Plans Peer Group 20% 20% 20% Private Plans Peer Group 15% 16% 16% 10% 9% 1Plan Design in Higher Education: Best 5% 6% Practices for Improving Retirement Readiness 0% Below 6% 6%-8% 8%-10% 10%-12% 12%+10 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    11. 11. Benefit Plan Design – Young Savers Pre-Retirees AccumulatorsYoung Savers Nearly all defined contribution plans require an employee to defer salary to derive adequate retirement benefits • A general rule of thumb is 10-15% total to generate adequate income replacement 1. Employee Mandatory Contributions 2. Automatic Enrollment and Automatic Escalation 3. Adopting a Hybrid Match Formula11 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    12. 12. Benefit Plan Design – Young Savers Employee Mandatory Automatic Enrollment and Adopting a Hybrid Match Contributions Automatic Escalation Formula Pros 100% adoption. Unlike nearly Fundamentally does not change In some instances, a hybrid every other option, mandatory the “contract” between match formula may reduce the means mandatory and all participant and plan sponsor. cost of contributions by the participants (and the sponsor) Plan participants are provided sponsor. Participants may be benefit as a result. an option to opt-out based on incented to “engage” in their their needs, but many retirement planning process. participants elect to automatically enrolled and thereby become participants. Cons Employees may eventually While automatic enrollment can Impact of the change may not be perceive employee mandatory be instituted in such a way to as significant as the political cost contributions as an additional address current employees who of adopting. Further, the lowest employer contribution thereby are not deferring, it is most paid employees will likely see reducing the perceived value of typical to begin automatic their retirement preparedness their compensation verses enrollment prospectively thereby decline, which may not meet the peers. reducing its potential impact on social justice policies of the current participants. sponsor.Implementation Very difficult. The perceived Relatively easy. Employees Difficult. Taking current compensation takeaway will be surveyed generally support the contributions made by the considerable for most implementation of automatic sponsor and making them institutions. enrollment, especially when it contingent is seen as a does not impact them. Older takeaway; even in instances payroll systems can be where the potential contribution challenging to customize in a grows. manner supportive of automatic increase and enrollment features.12 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    13. 13. Higher Education Lags Behind Other Industries inUsage of Automated Plan Features1 Annual Increase Automatic Enrollment ProgramHigher Education <5% <5%Not-for-Profit Healthcare 29% 49%Corporate 22% 76% 1Plan Design in Higher Education: Best Practices for Improving Retirement Readiness13 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    14. 14. Automatic Enrollment Works The Impact of Automatic Enrollment on Participation Rates in Corporate DC Plan190% 83%80%70%60% 54%50%40%30%20%10% 0% Non-AE Plan Participation Rate AE Plan Participation Rate 1Plan Design in Higher Education: Best Practices for Improving Retirement Readiness14 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    15. 15. Benefit Plan Design – Accumulators Pre-Retirees AccumulatorsYoung Savers “Neither a borrower or a lender be” 1. Plan Rollovers 2. Retirement Plan Loans 3. Hardship Withdrawals15 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    16. 16. Retirement LeakageOnly 20% of employees who take a lump-sum distribution roll proceeds into atax-qualified IRA or retirement plan account GAOParticipants age 35-45 are more likely to borrow – and when they do, are morelikely to take the maximum – as compared to their younger and oldercounterparts Borrowing from Yourself: The Determinants of 401(k) Loan PatternsEstimated participant loan default rate from July 2011 – May 2012 was 17.4% Navigant EconomicsPrevailing plan interest rate is tied to Prime (3.25%)Hardship distributions are much less prevalent (typically less than 2% annually)16 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    17. 17. Defined Contribution Plan Participants’ Activities(2006-11) 2006 2007 2008 2009 2010 2011% of Active Participants with a 15.0% 16.0% 15.3% 16.5% 18.2% 18.5%LoanUS Retirement Assets in Defined $4.1 $4.4 $3.4 $4.0 $4.5 $4.6Contribution Plans ($trillion) % of Active Participants with a Loan20.0% 18.5%18.0% Investment Company Institute, Defined Contribution Plan Participants’ 18.2% Activities 2011, April 2012 16.0%16.0% 16.5% 15.0% 15.3%14.0%12.0%10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2006 2007 2008 2009 2010 201117 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    18. 18. Benefit Plan Design – Pre-Retirees Pre-Retirees AccumulatorsYoung Savers Help participants keep their eyes on the prize 1. In-service plan distributions 2. Early retirement windows18 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    19. 19. In-Service Plan DistributionsPlans routinely provide older employees (59 ½ - 65) the ability to begin takingdistributions from their retirement plan1. Maintain a focus on retirement2. In-service distributions should ideally be tied to phased retirement programs with committed dates of retirement403(b) plans are flexible in allowing employers to make post-severancecontributions to a retirement plan. Plan sponsors should be judicious with theutilization of these features1. Early retirement needs to be highly targeted2. Utilization of early retirement may shape expectations about future availability and alter normal plan behavior19 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    20. 20. Plan Services Participant Type How Participants Self-Identify• K.I.S.S. your participants Delegators 69% • Easy to enroll Do-It-Yourselfers 30% • Easy to allocate Self-Directed Sophisticates 1% • Easy to use Source: J.P. Morgan Retirement Plan Services Impact of Choice on P a r t i c ip a t i on Rates• Sophisticates will optimize outcomes in a any plan design Source: Iyengar, Sheena S.; Jiang, Wei; Huberman, Gur “How Much Choice is Too Much?: Contributions to 401(k) Retirement Plans”20 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    21. 21. Investors Fail to Track the MarketAnnualized Returns for the 20 Years Ended 12/31/201010.00% 9.14% 9.00% 8.00% 6.89% 7.00% 6.00% 5.00% 3.83% 4.00% 3.00% 2.57% 2.00% 1.01% 1.00% 0.00% Avg. Equity Investor S&P 500 Index Avg. Fixed Income Investor Barclays Agg Bond Index Inflation Source: Dalbar, Inc. 2011 Quantitative Analysis of Investor Behavior21 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    22. 22. “Easy” Investment Structures Managed Account Target Maturity Target RiskStructure Managed account structures Participants are invested in a Target risk defaults are typically typically use an array of single fund with a a single balanced fund that underlying products and predetermined glidepath that allocates between stocks and allocate to them based on becomes more conservative as bonds in a manner consistent information known about the a participant nears a specified with its prospectus. participant. There are a finite age (typically 65). number of portfolios a participant may be invested in based on the data known.Pros Managed account solutions Provides some customization A balanced fund is the simplest carry far more known data for participants with only a date- of the default investment about a participant, such as of-birth variable. Typically is a structures, a single investment wage which has a material lower cost alternative to other product for any participant who impact on investment allocation default investment structures. fails to make an election or strategy. Some managed wishes to delegate investment account solutions also allow allocation and monitoring. customization of the analytics to incorporate known data about the population being served, such as turnover.Cons Can be a more expensive total Age is an important factor in Target risk solutions invariable cost of ownership as driving asset allocation strategy, provide too much volatility for investment product costs are but not the exclusive factor. older works and too little equity compounded by a managed Additionally, target date funds exposure for younger workers. account fee. are typically closed solutions.22 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    23. 23. Investment Returns Cannot Fix Savings Problems5 Year Annualized Returns (Period Ending 12/31/2010) Percentile Single Target- Managed All Other Date Fund Account Participants Mean 3.93% 3.65% 3.76% 5th 3.62% 2.20% -0.02% 25th 3.62% 3.08% 2.66% 50th 3.90% 3.66% 3.80% 75th 3.90% 4.22% 4.64% 95th 4.65% 5.06% 8.09%Source: Vanguard 2011 “Participants During the Financial Crisis: Total Returns 2005-2010” 23 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    24. 24. Education has Limits“…policy makers should be very concerned that retirement education does notincrease the likelihood that financially vulnerable groups – women, personswithout a college degree, and particularly persons with lower incomes – willsave their distributions” U.S. Social Security Administration Office of Policy. “Does Retirement Education Teach People to Save Pension Distributions?”Peer behavior may be as or more impactful on participant savings behaviorthan employee education E. Duflo, E. Saez / Journal of Public Economics 85 (2002)24 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    25. 25. Employee Education TipsDuring Enrollment1. Focus education on financial literacy and savings behaviors2. Deemphasize the importance of investment selection on retirement plan participation3. Do not require education as a predecessor to participation4. Appreciate the importance of peer group behavior and leadership in furthering retirement plan performanceDuring Accumulation1. Begin educating on external factors on retirement (healthcare, insurance, social security, etc.)2. Highlight the effectiveness of current behaviors and the culture of savings and participation3. Provide access to additional personal education resources to validate savings goals and structure25 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    26. 26. Pre-Retiree NeedsViewing the participant as a whole1. Bringing retirement plan projections to a fine point • External assets • Spousal income • Spending needs • Healthcare costs/resources • Understanding federal and state resources2. Advice for participants on how to secure and protect accumulated savings • Asset allocation • Liquidity constraints • Comprehensive retirement planning3. Transitioning accumulations to income • Annuity options • Income planning26 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    27. 27. The Optimal Higher Education Plan Design Easy to Start 1. Automatic Enrollment and investment 2. Automatic escalation towards full retirement preparedness 1. Limit loans 1. Extensive 2. Limit hardships education, planning, a 3. Encourage retirement nd projections rollover 2. Focus on retirement as the goal Safe to Leave27 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    28. 28. Five Steps to Improving Your Plan and YourInstitution1. Evaluate the Current Retirement Readiness of Your Institution as a Benchmark Remove Measure Plan obstacles to2. Determine Obstacles to New Hire Effectiveness participation Participation3. Develop Mechanisms to Move New Hires Towards Adequate Income Replacement4. Plug the Holes Educate Improve • Current loan demographics towards the deferral rates goal of a and • Hardship withdrawal impact successful participant5. Build the Communication Plan to retirement behavior Support the Objective • Develop and Education Policy Statement Plug holes • Early emphasis on savings • High-touch participant advice and financial planning for pre-retirees28 PLAN DESIGN TRENDS IN HIGHER EDUCATION
    29. 29. DisclosuresMultnomah Group, Inc. is an Oregon corporation and SEC registered investmentadviser.Investment performance and returns are based on historical information and are nota guarantee of future performance. Investing contains risk. Some asset classesinvolve significantly higher risk because of the nature of the investments and thelow liquidity/high volatility of the securities.Any information and materials contained herein or on our website are provided forgeneral informational purposes only and are not intended to be comprehensive forany particular subject. Multnomah Group utilizes information from third partysources believed to be reliable but not guaranteed, and as a result, information isprovided to you "as is." We do not represent, guarantee, or provide any warranties(either express or implied) regarding the completeness, accuracy, or currency ofinformation or its suitability for any particular purpose. Multnomah Group shall notbe liable to you or any third party resulting from any use or misuse of informationprovided.Receipt of information or materials provided herein or on our website does notcreate an adviser-client relationship between Multnomah Group and you.Multnomah Group does not provide tax or legal advice or opinions. You shouldconsult with your own tax or legal adviser for advice about your specific situation.29 PLAN DESIGN TRENDS IN HIGHER EDUCATION

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