by Sam Kirby, CFA
This is the first in a series of articles intended to help higher education plan sponsors and retirement plan committees address their fiduciary responsibilities and the needs of their participants.
U.S. colleges and universities have long driven change, impacting the individuals they educate, their communities, and the fabric of modern life. Higher education institutions have advanced civil liberties, innovated in science and the arts, and provided greater opportunities for all members of society to achieve fulfillment once reserved for the few. Yet, the same institutions that have brought so much innovation are now facing immense changes, including:
- Evolving business models, as digital learning begins to disrupt the campus-based learning model that has existed since the Athenian Lyceum;
- Intense competition for students requiring investment in program development and capital expenditures;
- Increasing demand to produce graduates with specific and evolving skillsets; and
- Financial stress, as these changes’ costs have grown faster than many institutions’ budgets.
Against this backdrop, another facet of change has emerged. While appearing minor in comparison to the challenges noted, it has broad implications for workplace culture, workforce management, productivity, and risk management: the role of institutions in managing their retirement programs.
The path from the 403(b) plan of yesterday to a modern retirement benefit program is complex and, like any successful transformation, requires the thoughtful application of change management practices. This article series will apply a change management framework to guide plan sponsors through understanding the drivers of change, assessing plan sponsors’ current retirement programs, evaluating opportunities for and barriers to change, and providing strategies for overcoming these barriers to achieve a retirement plan to match the goals of both the institution and plan participants within a sound fiduciary framework.
Change Management Principles
Transforming the retirement plan of the past to one that will achieve an institution’s future goals is a complex undertaking, one that is best achieved within a change management framework. The firm Strategy& (formerly Booz & Company) defines change management as a “systematic approach to enabling people in an organization to transition from their current state to a desired future state.” This definition can apply to issues involving business strategy and organizational restructuring to technology projects, such as a new payroll system, or initiatives such as modernizing a retirement program.
In his book Change Management: The People Side of Change, author and change management consultant Jeffrey M. Hiatt explains that change management “is the bridge between solutions and results, and is fundamentally about people and our collective role of transforming change into successful outcomes for our organizations.” The author goes on to establish five tenets of change management:
- Tenet #1: We change for a reason.
- Tenet #2: Organizational change requires individual change.
- Tenet #3: Organizational outcomes are the collective result of individual change.
- Tenet #4: Change management is an enabling framework for managing the people side of change.
- Tenet #5: We apply change management to realize the benefits and desired outcomes of change.
This article focuses on the first tenet: the reasons for and drivers of change. Future articles will delve into specific elements of change, including vendor management, fiduciary responsibility and risk, understanding participant behavior and plan design, investment menu construction, and communication strategies designed to limit disruption while achieving higher levels of participant engagement.
The first step in undertaking any sort of change management is to answer the question, “Why is change needed?” We know from physics that an object at rest remains at rest without the presence of an outside force. What are the forces pushing plan sponsors to consider such dramatic changes to their retirement benefits? Why invest the time, attention, and financial resources or risk disrupting faculty and staff? Four key drivers—environmental forces, the regulatory landscape, recordkeeper evolution, and participant engagement—have converged to make now the right time to consider change.
In some ways, the change in college and university retirement benefit programs mirrors that of the private sector. Common catalysts include the decline of defined benefit programs and the rise of defined contribution plans as the primary means to retirement security, demographic issues that come with an aging workforce, a savings crisis that has led many individuals to undersave, and widespread financial illiteracy. Additionally, the higher education market faces several specific challenges, including:
- Heterogeneous workforces, including tenured faculty and staff and an increasing number of workers coming from the private sector;
- Plan designs and contribution formulas that were often established decades ago; and
- Governance frameworks and retirement plan committees that may still be coming to terms with their roles, responsibilities, and risks.
For the most part, plan sponsors and service providers understand the final 403(b) regulations that went into effect on January 1, 2009. Yet, some sponsors are still wrestling with implementation aspects, including retirement committee formation, recordkeeper fee and service benchmarking, investment policy statement development, investment menu evaluation, and investment monitoring.
Addressing these aspects successfully requires a fundamental shift in mindset. Formerly a plan facilitator tasked with making a plan available to employees, processing contributions, administering salary deferrals, and coordinating vendors, the sponsor is now a plan fiduciary. Formal fiduciary training can help change this mindset and provide a lens through which to view these aspects and make sound decisions for the benefit of participants. It also demonstrates a commitment to procedural prudence and a well-documented governance framework.
Retirement plan recordkeepers and other service providers have adapted to similar regulations in the 401(k) marketplace. But, because the 403(b) marketplace predates the introduction of the 401(k) by several decades, it evolved along a different path and is still dominated by individual insurance contracts and proprietary investment products.
Today, the major 403(b) providers, including Fidelity, TIAA-CREF, Transamerica, Vanguard, VALIC, and Voya, among others, offer modern recordkeeping platforms with:
- Open architecture, enabling the use of third-party mutual funds and other investment products;
- Group platforms, allowing plan investment decisions without requiring individual participant action; and
- Fee flexibility, providing fiduciaries with the ability to control who pays plan-related fees and how they are paid.
Yet, impediments arise since plan sponsors cannot simply flip a switch to take advantage of these enhancements. They cannot direct individual contracts at a group level, and liquidity restrictions on some of the most-utilized investment products (notably TIAA Traditional) further complicate matters. Plan modernization requires understanding the current platform; evaluating its flexibility, restrictions and fee structure; and potentially designing a road map to a new platform while minimizing participant disruption.
Plan sponsors can invest months evolving their plans: optimizing vendor relationships, studying participant demographics, assessing plan design, constructing investment menus, and ensuring sound fiduciary governance. In the end, their work cannot ensure that participants take advantage of the new capabilities, or even understand why the plan needed alteration in the first place. When it comes to participant behavior, there is no greater influence than inertia.
We can never forget the “participant” part of the “participant-directed plan.” When operating a successful retirement program, one that enables participants to save, invest, and accumulate assets adequate to fund a secure retirement, there comes a time when the burden shifts from the plan sponsor to participants to make good choices and set themselves on a path toward success. Institutions can use the following strategies to shape and communicate decisions about plan changes:
- Simplifying plan messaging—Visit some higher education institutions’ human resources websites and you may see a lengthy section on retirement benefits, something like “ACME University is proud to offer a number of retirement plans, including 401(a) plans through vendors including TIAA-CREF and Fidelity, as well as supplemental 403(b) or 457(b) retirement programs offered by vendors including TIAA-CREF, Fidelity, Vanguard, and VALIC.” In this hypothetical example, it is difficult to tell who controls the plan and where employees can go for guidance. For a new employee trying to find her way to the lab without losing too many pages from her benefits binder, that is a lot to digest. Taking control of messaging is a critical element of plan modernization. It is important to create a consistent message around the “ACME University Retirement Plan,” using straightforward language that tells employees where they can get help, how to understand the decisions they must make, and what occurs if they do not make an active election.
- Explaining Roles—Long-tenured participants may bristle at the thought of a committee taking action, such as selecting, closing, or mapping funds, on their behalf. They may not understand the need for change or the gap that exists between engaged and disengaged participants. A letter of explanation that is simple and free of jargon, Internal Revenue Code citations, and acronyms may go a long way to set the stage for successful change. It should also explain the committee’s origin and composition, the scope of its control, resources and consultants available to assist it, the process it will follow, and how faculty and staff can provide input.
- And Shared Responsibility—Most human resources professionals can relate to the following scenario: a long-time, valued, hardworking employee arrives to complete his retirement paperwork. He has participated in the plan since his first day on the job, has amassed $78,000 in his retirement account, and is eager to learn what this balance will yield in retirement income. This story often ends in disappointment, resentment, anger, or even tears when he realizes his means will not fit his dreams. Sponsors cannot make investment decisions for their participants (aside from the contribution formula and qualified default investment alternative election), but they can take several steps to reduce the possibility of this scenario, such as:
- Understanding how participants use the plan today,
- Evaluating alternative plan designs that encourage higher deferral rates,
- Determining whether pockets of participants are at greater risk,
- Creating an investment menu that provides choices for all investor types,
- Establishing baseline measurements and engaging participants to improve behaviors in key areas, and
- Communicating with participants about their shared responsibility—and how the coming changes will help them reach their goals.
This article highlights the convergence of environmental, regulatory, administrative, and employee engagement forces driving the need for change within the retirement plans of U.S. colleges and universities. Retirement plan evolution is a daunting and complex task for plan fiduciaries. It is this complexity that makes a change management framework appropriate and necessary. However, just as every institution and participant population is unique, and arrived at its current state based upon events and decisions spanning decades, there is no single path forward. An important exercise early in the process is to envision what you want the plan to look like in five years, and to prioritize enhancements most important to the institution. Because some changes must unfold sequentially, while others can occur in parallel, this evaluation will help shape the roadmap and timeline.
We look forward to sharing further details of our experience in future articles covering the following topics:
- Regulatory issues and plan governance
- Vendor management and payment of plan-related fees
- Investment menu construction, selection, and monitoring
- Participant behavior, communication, and engagement strategies
- Implementing plan changes
As always, if we can provide help with your retirement program, please contact your CAPTRUST financial advisor or email us at firstname.lastname@example.org.
 Hiatt, Jeffrey; Creasey, Timothy (2013-08-19). Change Management: The People Side of Change. Prosci Learning Center Publications.