benchmarking your dc plan - bridgebay financial, inc. afp conference benchmarking your defined...
TRANSCRIPT
2007 AFP Conference
Benchmarking Your Defined Contribution Plan
Presented by
Linda Ruiz-ZaikoPresidentBridgebay Financial, Inc.www.bridgebay.com
Brad Vollmer, CFAAssistant TreasurerSun Microsystems, Inc.www.sun.com
Sue WuthrichDirector, Global BenefitsGoogle Inc.www.google.com
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2007 AFP Conference
Benchmarking Your Defined Contribution Plan Costs
Linda Ruiz-ZaikoPresident
Bridgebay Financial, [email protected]
www.bridgebay.com
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Bridgebay Financial, Inc.
Launched in 1987, Bridgebay Financial, Inc. has been redefining the standard of excellence in institutional investment strategies for the past 20 years. Bridgebay's client list includes some of the most prestigious Fortune 500 and NASDAQ companies. Bridgebay Financial, Inc. is a registered investment advisor under the Investment Advisor Act of 1940.
Each of our consultants has over 20 years of Wall Street experience advising institutional investors, corporations, foundations and endowments. Our talented dedicated team of professionals have the practical experience at major global institutions in addition to holding MBAs and are CFA charter holders. These credentials empower us to create pragmatic solutions to a diverse range of consulting engagements.
We also advise defined benefit plans. In addition, we have been retained to provide the following consulting services for multi-employer 401(a), 457, 457(b) and 457(f) plans: initial assessment and analysis of plans, benchmark current plan providers, fee analysis, fund lineup, pre-screen and conduct a customized RFP provider search to enhance services, fee and contract negotiation, pricing, and selection of a diversified fund array.
© 2007 Bridgebay Financial, Inc.4
Factors Influence Plan Costs
Plan CostsPlan Costs
RegulatoryUpdates
Compliance
RegulatoryUpdates
ComplianceInvestmentStructure
InvestmentStructure
EducationCommunication
EducationCommunication
Recordkeeping/ AdministrationRecordkeeping/ Administration
© 2007 Bridgebay Financial, Inc.5
Fee Transparency
Recent revenue sharing lawsuits name plan sponsors and providers• Fiduciary duty to manage plan costs
Unreasonable expenses and hidden fees• Company stock• ERISA 404( c)
Failed to adequately discloseAllege no Safe Harbor protection
GAO Study on Plan ExpensesNew IRS 5500 Fee DisclosuresPotential conflicts of interest for Plan Sponsor• Revenue sharing can shift costs from sponsor to
participants• ERISA Section 404(a)(1): “Exclusive Benefit Rule”
© 2007 Bridgebay Financial, Inc.6
Types of Fees
Billed expenses• Fee is itemized and charged for specific services
Participant-based• Fees charged per participant• Asset-based fees - % plan assets• Expense ratios, netted against participant accounts
Direct expenses Indirect or embedded expenses
© 2007 Bridgebay Financial, Inc.7
Revenue Sharing
The key players• Investment management• Recordkeeping• Third party administration• Trustee Services• Legal counsel• Education and communications• Investment consultant• Financial advisor
Unbundled providersBundled providers
© 2007 Bridgebay Financial, Inc.8
Typical Revenue Sharing
Plan Sponsor pays expensesPlan Sponsor
pays expenses
Participants payexpenses
Participants payexpenses
Participants pay investment expenses,
net returns
Participants pay investment expenses,
net returnsRecordkeeper/Administrator
Recordkeeper/Administrator
Investment fund revenue share pays expenses*
Investment fund revenue share pays expenses*
*When revenue share exceeds plan recordkeeping/administrative fees, excess revenue share can be applied to plan expenses or rebated to participants.
Direct Expenses
Indirect Expenses
© 2007 Bridgebay Financial, Inc.9
Revenue Sharing Disclosures
Revenue share is derived from:• 12(b)-1 fees• Investment management fees• Administrative services charges• Multiple share classes• Sub-transfer agent fees• Finder’s fees• Overrides, volume, asset incentives• Asset charges or wrap fees• Group annuity contract charges
Disclosure of revenue share $ amounts as % of assets• Use of outside funds• Proprietary funds• Expected future revenue share payments
© 2007 Bridgebay Financial, Inc.10
Benchmarking Categories
Plan Features• Employer match• Participation loans• Contributions • Asset allocation
Provider Organization• Commitment to business base• Organization structure• Staff experience, turnover• Resources
© 2007 Bridgebay Financial, Inc.11
Benchmarking Categories
Trustee• Functions• Financial strength• Audited internal controls
Technology• Internet, IVR, live representatives• Multi-lingual• Compliance• Data back-up and disaster recovery
© 2007 Bridgebay Financial, Inc.12
Benchmark Administration
Administration• Flexible plan designs • Systems flexibility• Plan level reporting• Participant reporting• Transactions timeframes• Types of processing• Troubleshooting procedures• Personnel experience, turnover• Performance assurances
Reporting and Compliance• IRS and DOL updates• Discrimination testing • Government reporting • Annual summary reports• SPDs
© 2007 Bridgebay Financial, Inc.13
Benchmarking Investments
Investments• Asset allocation • Variety of fund families• ERISA Section 404 (c)• Performance• Lifestyle funds• Flexibility to change• Outside funds window
Indexed • Actively managed• Company stock• Brokerage accounts• Institutional or retail funds• Share classes• Investment fees
© 2007 Bridgebay Financial, Inc.14
Benchmarking Categories
Education and Communications• Enrollment, re-enrollment• Multiple media• Intranet/Internet• Seminars, investment education• Financial planning• Asset allocation
Fee analysis• Direct fees• Indirect fees• Revenue-sharing disclosure• Form 5500 fee disclosures• Cost comparisons
© 2007 Bridgebay Financial, Inc.15
Administration Recordkeeping Fees
Current Plan Plan Sponsor
Eligible Employees 11,001
Plan Participants 9,903
DescriptionCurrent
Provider Industry Average Provider A Provider B Provider C
Annual Base Fee
Billed Expenses
Indirect Fees
Per Eligible Fee
Per Participant Fee
Provider Administration/Recordkeeping Fees
© 2007 Bridgebay Financial, Inc.16
Average Plan Expense Ratios
Description Current Provider Average Provider A Provider B Provider C
Average Equity Expense Ratio 0.00% 0.00% 0.00% 0.00% 0.00%
Average Bond Expense Ratio 0.00% 0.00% 0.00% 0.00% 0.00%
Average Money Market / Stable Value Expense Ratio 0.00% 0.00% 0.00% 0.00% 0.00%
Average Additional Asset Management Rate 0.00% 0.00% 0.00% 0.00% 0.00%
Average Expense Ratios
© 2007 Bridgebay Financial, Inc.17
Compensation for Service Provider
Amount % Amount % Amount % Amount % Amount %
Investment Manager
Trustee/Custodian
Advisor
Recordkeeper
Administrator
Legal - Plan Amendments
Accounting
Participant Communications
Total Annual Compensation
Provider B Provider C
Compensation for Service Provider - Revenue Share
DescriptionCurrent Provider Industry Standard Provider A
© 2007 Bridgebay Financial, Inc.18
Benchmarking Categories
Plan FeaturesProvider OrganizationTrusteeTechnologyAdministrationReporting / ComplianceInvestmentsEducationCommunicationFee analysis
© 2007 Bridgebay Financial, Inc.19
Profit sharing/401(k) Council of America 2006 401(k) Plan Survey
2006 401(k) Plan Survey1,000 plans $600 billion in assets
41.3% of plans - automatic enrollment18.4% of plans - Roth 401(k)
11.6% eligible participants use optionCompany contributions
Average 4.7% of payrollHighest - Profit sharing plans average 9.2% of payLowest - 401(k) plans average 3% of pay
Investment options2006 - Average 19 options2004 – Average 18 options2003 – Average 17 options
Asset Allocation70% Equities – 30.6% active domestic equity mutual funds
© 2007 Bridgebay Financial, Inc.20
Employee Benefit Research InstituteInvestment Company Institute
Survey 1999-200653,931 401(k) plans 20 million 401(k) plan participants$1.2 trillion in assets
Account balancesAverage account grew 8.7% per yearAverage grew + 79% to $121,202 Median grew +168% to $66,650
Employer stock holdings dropped13% 1999 to 11% 2006
© 2007 Bridgebay Financial, Inc.21
Recommendations
Retain independent, third party to benchmark costsVerify
Fees, expenses, revenue sharing Institutional share classes from providers
Use institutional share class no retail fundsUse expense reimbursement accountsRequire providers to disclose all compensationRenegotiate asset-based fees as plan growsBenchmark services and fees• Develop a benchmarking peer group• Renegotiate for additional services
© 2007 Bridgebay Financial, Inc.22
Additional Resources
• “Uncovering and Understanding Hidden Fees”http://www.401khelpcenter.com/pdf/mdh_understanding_fees_v2.pdf
• Plan Fees Disclosure Form www.dol.gov/ebsa/pdf/402krefm.pdf
• “Understanding Plan Fees and Expenses”www.dol.gov/ebsa/pdf/undrstndgrtrment.pdf
• GAO Study on Fees• “A Look at 401k Plan Fees for Employees”
www.dol.gov/ebsa/publication/401k_employee.html
© 2007 Bridgebay Financial, Inc.23
Additional Resources
Defined Contribution Fee Disclosure Best Practices (April 2006• (www.afponline.org/pub/pdf/Fee_Disclosure_Primer_Final.pdf)
Understanding Retirement Plan Fees And Expenses • (www.dol.gov/ebsa/publications/undrstndgrtrmnt.html)
Allocation of Expenses in a Defined Contribution Plan (FAB 2003-3) • (www.dol.gov/ebsa/regs/fab_2003-3.html)
“Report of the Working Group on Fee and Related Disclosures• (www.dol.gov/ebsa/pdf/ac_111704_report.pdf)
Profit Sharing and 401(k) Plan Cost Disclosure Worksheet• (http://www.psca.org/pdfs/feeworksheet.pdf)
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Brad Vollmer, CFAAssistant TreasurerSun Microsystems, Inc.
AFP October 2007
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Sun Microsystems' Plan• Over $4 billion in Assets
• More than 30,000 participants
• Average account balance >$120,000
• Unbundled Plan
• 15 Investment vehicles> Stable Value (1)> Target maturity (1 fund family with 11 funds)> Fixed income (1)> Balanced (1)> Domestic equity (10)> International (1)> No company stock
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401K Trends
Past Current Future
Enrollment Individual's choice Enrollment Auto Enrolled Enrollment Auto Enrolled
Record Keeping Bundled Plans Record Keeping Unbundled Record Keeping Unbundled
Tools Tools Tools
Investment Vehicles Investment Vehicles Investment Vehicles Separate accounts
Unsophisticated Lifestyle Unsophisticated Target Maturity Unsophisticated
Moderate Funds Moderate Funds Moderate Plan Funds Sophisticated NA Sophisticated Brokerage Window Sophisticated
Investment Menus None existent Investment Menus Tiering Investment Menus Simplified Tiering
None or limited to Record Keeper
Record Keeper, Financial Engines, Morningstar
Financial Engines, Morningstar
Mutual Funds (limited choice)
Mutual Funds/comingled accounts (too many choices – confusing)
Target Maturity – Customized
Brokerage Window/Alternative Assets
Fee T
ransp
arenc
y
Institutional/penison-like approach needed
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Future of 401k Plans – 3 Major Trends
1) Auto enrollment
2) Tiering of Investment Choices
3) DB ing of Defined Contribution Plans
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Auto Enrollment - Default Funds• Increasingly more common
• Requires the following:> No financial penalties or restrictions on the ability of a participant or
beneficiary to transfer the investment from the QDIA to any other investment alternative available
> Funds must be either managed by an investment manager or an investment company registered under the Investment Company Act of 1940
> Funds must be diversified so as to minimize risk of large loss> Participant contributions may not be directly invested in employer
securities> Eligible investments include: life cycle or target date retirement funds,
balanced funds or professionally managed accounts
Auto enrollment ensures that everyone participates in the retirement planning process
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Tiering – Simplifying the Decision
Reluctant Investor Moderate Investor Passionate Investor
Tier 1 Tier 2 Tier 3
Fund Choices Fund Choices Fund Choices Brokerage Window
Alternative Assets
Fund Choices
Target Maturity / Lifecycle Funds
Passive Separate Accounts (Indexes)
(Built using customized Separate
Active Separate Accounts (Core Funds)
Investment Advice/Tools
Tiering helps frame the choices available to each participant in an easily understood method
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Db-ing of Defined Contribution Plans• Driver – Economics
> Costs – Separate Accounts can be 10 to 30 bps less than mutual funds> Benefits to Participant – Between $40k and $120k per participant (over 25
years assuming base account return of 10%., 15.5k contribution 7.2k match)
Base 10 BPS 30 BPS
0
250,000
500,000
750,000
1,000,000
1,250,000
1,500,000
1,750,000
2,000,000
2,250,000
2,500,000
2,750,000
3,000,000
3,250,000
3,500,000
Return
Acc
oun
t V
alu
e
Base 10 BPS 30 BPS
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
110,000
120,000
130,000
140,000
150,000
Return
Invr
em
enta
l Val
ue
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Db-ing of Defined Contribution Plans• Driver – Ability to offer Customized Funds
> Construction of Fund – With separate accounts, there is an ability to construct a fund using multiple managers. In a sector where capacity is an issue, this is a potential solution
> Customized Glide Paths – ability to construct customized target maturity funds
Manager A Manager B Manager C Manager D
Tim
e = 0
Tim
e =
5
Tim
e = 10
Tim
e =
15
Tim
e =
20
Tim
e = 25
Tim
e = 30
Tim
e = 35
0
10
20
30
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50
60
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Time
Ass
et
Allo
catio
n
A Treasury department is the right place to deal with customized strategies
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What does this mean for Treasury
1) Treasury/investment expertise required
2) Opportunity to add value
3) Job enrichment
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Brad Vollmer
Global Treasury
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Sue WuthrichDirector, Global Benefits
Evolution of Google’s401(k) Plan
Google Proprietary 2
1998 2000 2003 20052004 2006
?
Google evolution: more than just search
2007200220011999
Google Proprietary 3
• 10,000+ Googlers
• 40+ offices
• 20+ countries
Google Proprietary 4
More than half of our searches come from
outside the United States
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401(k) has always been an important component of the benefits offering
Since company inception we had a plan with a match
(100% up to $2,200)
Participants immediately eligible
Began with Fidelity’s fully bundled plan
Participation = 50 to 60%
17 investment options, never had company stock in the plan
© 2007 Bridgebay Financial, Inc.6
Benchmarking the Risk Spectrum
Small Cap Equity
Money Market
Lifecycle Funds
Lower Risk
Higher Return
LowerReturn
Higher Risk
Stable Value
Short Duration Bonds
High Yield Bonds
Real Estate
Convertibles/Preferred
Global Equity
International Large Cap Equity
Expected Risk(Standard Deviation)
Expe
cted
Rat
e of
Ret
urn
Large Cap Equity
Mid Cap Equity
Intermediate Duration BondsLong Duration Bonds
International Multi Cap Equity
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Benchmarking enabled significant changes to our plan
New bundled provider search, enhanced features of the planIndependent investment consultant
Monitoring and plan enhancementsAutomatic enrollmentIntroduced balanced fund as default fundIntroduced on-line financial planning services
Provides individual advice, financial planning, asset allocationEliminated Lifecycle FundsAdded “mix your own” funds using on-line service
Enhanced fund optionsIntroduced index funds
Lower expensesEfficient asset allocation
Selected top-rated actively managed funds for each asset class404(c) intent
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Auto Enrollment, Default Fund & Advice
Rationale for automatic enrollmentExplosive growth in new hiresEmployee must opt outMany of our new hires are unfamiliar with 401(k) plansWanted to ensure higher enrollment and participation levels
Default FundMoney market was previous defaultReplaced with top-rated balanced fund as default
Conservative and moderate options that still provide growthOn-Line Financial Advice
Employees are highly educated and engagedEngineers that are technologically savvyOnline quantitative system ideal for our populationEnables personal asset allocation
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Results of Auto Enrollment, Default Fund & Advice
Automatic enrollmentSuccessful – few opt outEmployee satisfaction is highParticipation level soared to ~88%
Default Balanced FundOnce selected limited transfers out of fund
Financial Engines – OnLine AdviceNot as widely used as anticipatedLimited usage and too complex to understandExperienced investors use online services
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June 2006 added additional features to the plan
Introduced Roth 401(k)Continue to match through the Traditional 401(k) PlanParticipation continues to grow
Implemented After Tax 401(k) contributions
Other plan sponsors benchmark against our plan features
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What our plan looks like today
Over 9,000 participants with more than $375 million plan assetsIn January 2007, we increased our matching contribution, greater of: 100% up to $2,500 or 50% up to IRS maximum
Participation level is ~96%
16 investment options – better asset allocationDefault fund – balanced fundMoney market fund6 index funds7 actively managed funds1 socially responsible fund
© 2007 Bridgebay Financial, Inc.12
Current Risk Spectrum
Money Market
Lower Risk
Higher Return
LowerReturn
Higher Risk
Stable Value
Short Duration Bonds
High Yield Bonds
REITConvertibles/Preferred
Global EquityInternational Large Cap Equity
Expected Risk(Standard Deviation)
Expe
cted
Rat
e of
Ret
urn
Large Cap Equity
Mid Cap Equity
Intermediate Duration Bonds Long Duration Bonds
Small Cap Equity
Conservative Balanced Moderate Balanced
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Our plan has seen significant growth over the years
1,4742,556
4,336
7,720 8,180
December December December December March2003 2004 2005 2006 2007
0
2,000
4,000
6,000
8,000
10,000
Number of Participants
$18$45
$97
$190
$274
December December December December March2003 2004 2005 2006 2007
$0
$50
$100
$150
$200
$250
$300
$350Millions
Total Plan Assets
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We take plan governance seriously
Investment Policy StatementReviewed and updated annuallyWatch list criteria for all fundsSpecific process to watch, retain, and replace fundsIndependent investment consultant as fiduciary
Investment CommitteeQuarterly meetingsHighly involved individualsMeetings have specific agenda set in advance Fund and plan due diligence by investment consultantReview feedback from participants
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What are we considering for the future?
Continue plan communicationTargeted communication to educate participants on default fund and default contributionsMaximizing match
Implementation of automatic increase in contributions
New investment alternativesFocus on 3 categories: Do nothing investor, Average investor, Advanced investorLifecycle fundsOpen brokerage window
Investigating “live” investment advice
Google Confidential and Proprietary
Thank You!Q&A