Simplified Employee Choices in New BU Retirement System

BU is simplifying its retirement plan, but the University contribution won’t change. Photo by Cydney Scott

In an effort to simplify the oversight and investment decisions of its employees, Boston University is streamlining its retirement plan investment options. These changes are consistent with those implemented by many peer institutions and do not impact the amount of the University’s retirement contributions. Employees have until Friday to choose from the new options.

To more effectively monitor the cost and performance of the retirement investment options offered through the plan, Boston University will consolidate the number of mutual funds and annuities. The plan will provide a series of target date or life-cycle funds, a small set of diversified asset class funds, and a brokerage account, which provides access to thousands of additional mutual funds.

The new investment options require employees to choose from one of two broad categories. The first, called “Selected Investments,” is so named because BU selected them based on such criteria as market performance, high-quality management, and low cost. Employees who choose this category can then elect from among three subcategories: target date or lifecycle funds (provided by the widely acknowledged low-cost provider Vanguard); a core lineup of 4 passively managed index funds and 11 actively managed funds—down from almost 300 funds currently available; and annuity choices provided by TIAA/CREF for those participants most attracted by a retirement income stream.

The second broad category, designed for more proactive investors, is a “Brokerage Window,” offering more investment vehicles than the Selected Investments, but requiring significant oversight responsibility by employees for the selection and ongoing monitoring of these investments.

Employees have been given two months, from October 4 to December 6, to make an election from these categories for the investment of all current and future contributions. Their current retirement balances, and all future contributions, will go into their chosen options beginning January 1, 2014. The exception is for employees with balances in TIAA-CREF annuities. As insurance contracts, those balances must remain in those annuities. Employees who don’t make an election will automatically be enrolled in a “Target Date Funds” (details below).

“A committee consisting of senior faculty and administrators spent a good deal of time considering proposed fund offerings to identify funds that are best in class, low-cost, and span the universe of assets that are appropriate for retirement savings,” says Martin Howard, BU senior vice president, treasurer, and chief financial officer, resulting in the following choices.

Target Date Funds are for employees who don’t feel they have the expertise and time to build their own investment portfolio. Their investments will be professionally managed, diversified, and automatically rebalanced. Participating employees need only choose the fund nearest to their expected retirement date. That fund invests their savings in a range of stocks and bonds, automatically and gradually shifting the portfolio to a lower risk asset allocation mix as they close in on retirement. This option will be managed by Vanguard using its Target Date Funds.

“It is commonly referred to as the ‘set it and forget it’ approach,” says Howard. Still, he notes, while these funds attempt to manage investor risk, as with any stock market vehicle, they are not totally risk-free.

Core Mutual Funds are good for employees who are more comfortable building their portfolio, choosing funds that invest in stocks, bonds, and money markets. This option lets participants choose both “active” funds (in which professional managers choose investments to beat the general market and/or a market index) and “passive” funds (in which managers try to mirror the returns achieved in a particular market index). The latter generally incur smaller operating expenses because of lower transactional and management costs. The University has selected a group of premier Core Mutual Funds, including those managed by Vanguard and Fidelity.

Core Annuities will continue to be offered through TIAA-CREF. Annuities are intended to provide a stream of payments, lasting for a fixed period of time or a lifetime, to their holders in retirement. Employees who have balances in existing TIAA-CREF annuities through the University may elect to put their future retirement contributions here or in the other new investment options. Employees choosing this route will have four TIAA-CREF annuities from which to choose, including the firm’s TIAA Traditional Annuity, the only fund in all categories offering a guaranteed interest rate (that is, it’s the most conservative fund offered).

The Brokerage Window is a self-directed brokerage account. Participants have a choice of thousands of mutual funds for investing that are not included as part of the Selected Investments menu, Howard says. This option provides employees the opportunity for choices outside of the Selected Investments, but requires that employees have the time and financial expertise to assess, monitor, and manage those chosen funds. Unlike the Selected Investments, BU will not screen or monitor the mutual funds offered in the Brokerage Window. Participants will be required to place buy, sell, and transfer orders by logging in to their accounts.

Fidelity, chosen by the University as the record-keeper for all but the Core Annuities, will charge employees in the plans a fixed $65 annual fee, which on average is substantially lower than the previous fee structure.

The changes will affect more than 11,000 participants and almost $2 billion of assets saved for retirement, according to Howard. The University will regularly monitor and review the new Selected Investments. The committee worked with an experienced retirement plan consultant and considered peer schools’ experiences in crafting its plan changes, he says.

The IRS also requires employers to educate workers about their plan options, he says, and the University will offer numerous on-campus information sessions, educational workshops, online training, and one-on-one sessions to help faculty and staff understand the upcoming changes.

“With the new lineup,” Howard says, “the committee has stripped out funds that are duplicative, has included offerings that are best-in-class with respect to their particular category, and is making sure that people have sufficient, but not overwhelming choice.”

Find phone numbers to call requesting information from BU Human Resources, Fidelity, and TIAA-CREF here. Find a video presentation about the new system here. Find a brochure here.

This story was originally published on September 17, 2013.