Transforming Your Retirement Plan to Create Meaningful Change

There’s no sugarcoating it: The Covid-19 pandemic has wreaked havoc on the broader economy and, in turn, deteriorated the already challenged financial health of many colleges and universities.

But as we have seen many times over the past two years, challenges can yield opportunities for transformation. With the status quo already upended, now is a good time for colleges and universities to revisit and evaluate their retirement plans with a fresh perspective while keeping the end game in mind, identify changes that may help reduce costs and risks while improving employee retirement readiness, and strengthening an institution’s recruitment and retention efforts.

Exploring the Levers for Change
Colleges and universities are unique in character, in what they offer and in how they operate, and their retirement plans often vary greatly in structure, administration, and design. It’s hard to know where to start making change in such a complex landscape. An important first step is to focus on the range of potential actions — or levers for change — that can result in cost savings and improved outcomes.

For example, employer and employee contributions are one powerful lever for change: Institutions can modify contribution levels, alter matching formulas, or stretch vesting schedules. Another lever takes the form of fiduciary functions, such as benchmarking a plan’s investment options and fees to identify potential cost savings and/or simplify the plan’s investment lineup. Fiduciary-related functions can also help reduce plan risk and address concerns over potential litigation. Implementing automatic features is another potential avenue for change via opportunities to improve participants’ financial retirement readiness through auto-enrollment or the auto-escalation of contributions.

Understanding the available levers for change can be daunting, but retirement providers or plan consultants can help you explore these levers and focus on changes that make the most sense for your institution.

Modeling Change to Quantify Impact
When exploring your options, it’s vital to measure the potential impact of any proposed changes. A plan modeling tool can help you measure the costs associated with employee compensation and benefits and then estimate how changes would impact your institution’s liabilities as well as employee retirement readiness.

To illustrate this process, consider a hypothetical example of a mid-size university that wants to reduce costs and create a feeling of shared responsibility that engages employees in their own retirement planning. Under its current retirement plan, the university offers an 8% employer contribution to an employee’s 4% contribution.

Modeling a number of different scenarios, the university identifies a new plan design that reduces its employer contribution to 2%, implements a matching contribution up to 5% of participant salary and adds an annual auto-escalation feature capped at 7%. Modeling results show this new plan could save the university roughly $500,000 in the first year without hurting employee retirement readiness. In fact, total employer and participant contributions would increase from 12% to 14% annually over time, and long-term analysis shows that these changes would yield improvements in the ability of participants to retire at their desired age.

Follow a Methodical Approach
Implementing changes that deliver cost savings without sacrificing retirement readiness requires a comprehensive assessment. However, the evaluation process isn’t limited to a financial assessment; it must also take into consideration an institution’s unique culture and draw the support of different stakeholders. Examining the following factors can help you decide which options best align with your institution’s priorities and situation:

• Financial impact on the institution
• Financial impact on plan participants
• Political or cultural support for change
• Ease of implementation

Start Today for Long-Term Sustainability
Making any kind of big change in higher education isn’t easy. In an academic environment that values tradition and rigor, this process takes time and requires consensus from a range of stakeholders and influencers. Working with a trusted partner can help you through the process. The right partner will have both retirement plan and education industry expertise to help you navigate the complex cultural factors at play at your institution.

The effort is worthwhile, however, because the outcome can be game changing. Steps you take today will accelerate your institution’s journey toward greater long-term stability and competitiveness — and improvements in the financial and emotional well-being of your faculty and staff. For more information, check out “The Status Quo is Not an Option,” a detailed publication by Empower on modifying retirement plans to drive meaningful change.