As part of its benefits package, IMRF has long offered staff a 457(b) plan administered by separate providers. In 2015, however, IMRF began to question whether partnering with multiple providers was really the best choice for the plan's participants. To determine the most beneficial structure for our staff, IMRF undertook last year its first ever comprehensive review of its 457 plan providers. In doing so, IMRF discovered it could realize significant savings for employees by consolidating to one provider.
It's this discovery that prompts this special report. Just like IMRF, many of our participating employers partner with multiple 403(b) and 457 plan providers. By sharing our experience, and the best practices we learned, IMRF hopes to encourage our employers to undertake their own review of their 403(b) and 457 plan offerings, using our process as a guide. Doing so just might result in significantly reduced fees — and greater retirement security — for your employees.
Both the 403(b) and the 457 plan offer employees an opportunity to accumulate tax-deferred savings for retirement. The deferred amount is deposited into an account through payroll deductions and invested in a choice of mutual funds offered by the provider.
To assess the pros and cons of its three offerings, IMRF's Investment and Human Resource Departments worked together to conduct a comprehensive review of the current plan providers. As part of the review process, IMRF staff:
- Issued a Request for Information (RFI) to the three current plan providers and to one potential new provider, asking what advantages could be realized through consolidation to one provider.
- Assessed each provider's response based on "four P's":
- Price: recordkeeping/administration costs, revenue sharing arrangements, etc.
- Process: experience providing services to 457 plans, technology platform, etc.
- Performance: service reviews, participant education, etc.
- People: the organization's strength, service team, support staff, etc.
The entire process lasted approximately eight months. IMRF staff assigned grades to each provider based on initial analysis, meetings, and RFI responses. All findings — positive and negative — were presented to IMRF's Board of Trustees with the recommendation to select the top-ranking provider as IMRF's sole 457 plan provider.
The Board accepted the staff recommendation and IMRF has entered into a five-year contract with ICMA Retirement Corporation (ICMA-RC). In addition to receiving leading scores in the analysis, ICMA-RC showed the largest relative change in recordkeeping and administrative fees from the current 0.90% to a proposed 0.19%, a savings of 0.71%.
IMRF's analysis revealed inefficiencies within each plan offering. As a result of consolidating the assets from three providers into one, IMRF will receive lower recordkeeping and administration fees applied to employee accounts, economies of scale, and lower expenses for employees. Based on 2015 year-end plan balances (approximately $12.3 million as of December 31), IMRF estimates the negotiated fee reductions will save IMRF staff members over $60,000 in recordkeeping and administrative expenses annually. This translates to an estimated annual fee reduction of $50 (in recordkeeping and administrative costs) for every $10,000 in account value for IMRF staff members. Additionally, with the inclusion of institutional quality (i.e. zero revenue sharing), low expense ratio mutual fund share classes in the plan lineup, annual fee savings will be even greater for IMRF's participants. Considering that exorbitant investment management fees significantly erode potential retirement savings over time, these expense ratio reductions will significantly enhance the retirement security of our employees.
IMRF is excited about this improvement, and we wanted to share our experience with our employers. Like IMRF, many of our employers partner with multiple plan providers and may not have comprehensively reviewed their 403(b) or 457 plan offerings in some time. Yet employers serve as fiduciaries, meaning the employer is trusted to take care of employees' funds and assets, acting at all times for their benefit and interest. Essentially, it becomes an employer's duty to ensure reasonable investment options are offered to employees at a competitively low rate.
Consider learning from our example and undertaking such an effort. The key steps:
- Form a team to fully evaluate the provider(s) service models, fees, expenses, and investment options.
- Review if the provider(s) offer financially competitive rates and product offerings.
- Assess if the fund structure complements the staff's needs and financial goals.
You might discover that consolidating your 403(b) and 457 plan providers could lead to savings for your staff, while at the same time providing more attractive investment options.
If you have any questions about IMRF's experience, contact IMRF's Human Resources Manager Cara Bannon.
* Local units of government may offer 457 plans to employees while school districts may offer either 457 or 403(b) plans. IMRF can offer its employees only a 457 plan. Please consider the process and the potential benefits shared in this article as having relevance to all IMRF employers.