Linking Retirement Leaders

Saving millions of dollars for his clients and their employees, while successfully mitigating fiduciary risk are what Senior Consultant Michael Beczkowski, AIF, AIFA, CPFA, PPC, MSF, CHSA at Bolton Investment—a CEFEX registered investment advisory firm—does day in and day out.  He leads the Defined Contribution practice for the firm, where he focuses on fiduciary best practices, especially in the area of public defined contribution plans. Given Michael’s focus, and with a desire to support his practice, Columbia Threadneedle Investment’s Dan O’Shea, Regional Vice President—Investment Only Division and Michael Connolly, Regional Vice President (RIA Division) were quick to introduce Michael to Columbia Threadneedle Investment’s value-add program through the Retirement Learning Center. Retirement Learning Center sat down with Michael to explore his experiences and gather his insights as a leader in this market.

403(b) Plans Need a Governance Process Too!

One of the many behind the scenes aspects of our public school system is the employee benefits structure. Established in 1994, Bolton Investment (formerly Bolton Partners)—has gained a reputation in the industry as the first independent employee benefits firm to truly understand this niche market. Michael Beczkowski has been working with Maryland and Virginia public school districts for nearly 25 years, “getting things in order,” as he says, from a compliance perspective. He has seen a great deal of change during his tenure.

What have you seen over the years?

Public sector retirement plans are an interesting area—especially 403(b) plans for public schools. For many years, the government and school districts paid little attention to the oversight and governance of their 403(b) plans, relying heavily on plan providers to follow piecemeal directives regarding their operation. Historically, a school system’s main responsibility was as a payroll facilitator, simply deducting participant contributions, sending the money to the participant’s selected plan provider, and ensuring that participants were not contributing above the limits established in the Internal Revenue Code. But since 2009, with the release of final treasury regulations that were 40 years in the making, 403(b) plans and their sponsors have been required to follow a comprehensive body of federal guidance.  As a result, today the administration of 403(b) plans more closely resembles that of 401(k) plans. In essence, the IRS made 403(b) plan sponsors take an active role in their maintenance and compliance.  That’s where Bolton Investment and our plan assessment process comes in.

How does an engagement begin?

We begin with a thorough review of the plan, its makeup and operation. Most school districts haven’t done a comprehensive review of their plans since the Village People were topping the charts! And a lot has changed since then. For example, since 2009, virtually all 403(b) arrangements must be maintained pursuant to a written plan document, and the plan must contain all the material terms and conditions related to eligibility, benefits, contribution limitations, contracts available under the plan, and the time and form under which benefit distributions will be made.

What is your review process?

After obtaining the necessary governing resolutions, plan documents and service agreements, a typical review starts with a plan fee assessment (both administrative and investment).  We look at the current line up of investments and ask critical questions.  For example,

• How have the investment options been performing?
• How are the investment options being used?
• Are there redundant investment categories?
• How many funds are the vendor’s proprietary options?
• How portable are the assets?
• Are they annuity contracts or mutual funds?
• What is the compensation structure, surrender charges and other fees?
• What level of onsite support do investment representatives provide?

We then generate a comprehensive report that points out the shortfalls that we see and, more importantly, provides guidance and suggestions on how a district might improve its plan governance practices. Finally, we present our findings to the plan committee and offer a tutorial on the committee’s responsibilities.

What are common areas for improvement that you typically see?

Fees that are too high top the list.  We’ve seen cases where administrative fees are two to four times higher than the industry norm; and investment fees, in some cases, that are 10 times the average. Fees don’t have to be the lowest possible, but they do have to be reasonable for what participants are getting. Operating a plan in the best interest of it participants is imperative. It may not be in the best interest of plan participants if a plan chooses higher fee products when comparable, less expensive options are available. Another area of concern relates to a plan’s use of proprietary funds.  While not prohibited per se—we emphasize the need for caution and careful evaluation related to the potential for conflicts of interest to arise. It is a best practice to benchmark fees every two or three years.

When we examine the participant experience we often find plans that have a large number of investment options that may be confusing to participants with little help or support available from high-commissioned vendors that are MIA after the first year.

What are some of the material benefits plan committees see when they implement your suggestions?

Committees leave with a deeper understanding of the nature and types of plan fees. The end result often is a significant reduction in overall fees, greater fee equity and fee transparency.  For example, committees are intrigued to learn that, frequently, not everyone in the plan is paying the same recordkeeping fee; it is dependent on the types of investments selected. Some participants end up subsidizing other participants because of the investments they choose. Another light bulb moment relates to share class. For example, many plans that we evaluate often would qualify for a less expensive share class of funds. By understanding the differences, reviewing what the plan has and re-bidding, in many cases, they can get lower prices for similar products.

I think overall, the plan committees we’ve worked with have a new found appreciation for the importance of 403(b) plans and the committee’s role in proper plan governance. Many districts are realizing that standard pension benefits for employees may not be enough, so 403(b)s are taking on a more prominent role in helping participants accomplish a more financially secure retirement.