New retirement investing options

In an effort to monitor the performance of its employee retirement investment options more effectively, Harvard University this fall will consolidate the number of mutual funds and annuities in its retirement plan, replacing most with a series of  “lifecycle funds” that reflect an employee’s age-based needs. But the University still will allow interested employees to actively manage their own retirement investment portfolio by choosing from a small set of diversified asset class funds or by opening a brokerage account, which provides access to thousands of additional mutual funds.

The changes “are part of Harvard’s ongoing commitment to help employees build long-term financial security in retirement,” wrote Marilyn Hausammann, Harvard’s vice president for Human Resources, in a letter announcing the change. The moves “are the product of a yearlong process of analysis, study, and discussion by a committee of University faculty, academic, and administrative leaders.”

The featured lifecycle funds are diversified mutual funds that automatically invest more conservatively as retirement approaches. The funds hold a wide range of assets and automatically adjust the asset allocation, emphasizing wealth accumulation early on, then capital preservation as an employee ages. Harvard has selected “best-in-class” lifecycle funds from Vanguard, Fidelity, and TIAA-CREF that have strong performance track records and low built-in fees.

“We’ve stripped out the options that are not appropriate for most faculty and staff, and included options that are really people’s best options,” said professor David Laibson, a member of Harvard’s Retirement Investment Committee, which recommended the fund changes that will reduce the number of mutual funds and annuities in the core investment lineup from 282 to 18. “Lifecycle funds are an terrific choice because they automatically rebalance a portfolio in response to the employee getting closer to retirement and in response to asset prices moving around.”

Although lifecycle funds are designed to be the only investment that employees might need for retirement, Harvard also will offer some carefully chosen diversified “core funds” for those who want to construct their own portfolios using basic building blocks of stock and bond indexes. Faculty and staff who want even more options may also open a brokerage account through Fidelity and Vanguard, which provides access to thousands of additional funds.

Rita Moore, director of benefits and human resource systems, said the move is also a response to federal legislation designed to strengthen consumer and pension protections for employees nationwide. Moore said that trimming the number of funds would make it easier for Harvard to monitor the suitability and performance of the investments it offers, as the law requires.

“It is difficult to sufficiently monitor nearly 300 funds,” she said. “The reduction will allow Harvard to exercise greater oversight over our retirement funds’ fees, performance, and structure, and to fulfill our legal and fiduciary responsibilities as a retirement plan sponsor.”

Federal regulations have also recently clarified the rules for establishing a qualified default investment alternative (QDIA). In plain English, a QDIA is the fund into which employees’ retirement contributions are automatically placed if they do not actively choose an investment on their own. QDIAs must offer competitive management fees and expenses, periodic review, and diversification across stocks and bonds.

Until now, the default alternative for Harvard employees who do not make an active choice about where their retirement savings are invested has been one of two TIAA-CREF annuities, which are stable investments but with low long-run returns.  As of Nov. 12, newly hired faculty and staff who do not make an investment choice will be automatically invested into a Vanguard lifecycle fund with a target date closest to when they turn 65.

However, the structure and funding of Harvard’s retirement benefit will not change. The University will continue to make a defined contribution to the retirement account of every eligible employee, based on salary and age. (This Harvard contribution is independent of the employee’s contributions from their salary:  the “tax deferred Account” is a benefit that allows faculty and staff to deduct money from their paychecks on a pretax basis to save and invest additional funds for retirement.)

“There are absolutely no changes in retirement contributions or benefits from the University,” said Moore. “Nor is the way the retirement plan operates changing in any way. An employee who receives [the equivalent of] 10 percent of their salary today will still get that contribution after the fund change.”

Harvard will hold a special open election period from Oct. 6 through Nov. 12, during which employees may actively elect funds from the new lineup, as desired. They may open up a brokerage account during that time as well. Faculty and staff who wish to be enrolled in a lifecycle fund do not need to act at all. Their existing retirement balances will automatically be moved into a lifecycle fund with a target date closest to the year they turn 65, in most cases.  The lifecycle fund to which they are mapped will match the asset manager that they have actively chosen: Vanguard, Fidelity, or TIAA-CREF. (However, balances in one of the TIAA-CREF annuities, which include Harvard’s current defaults, will only be moved at the employee’s request.).

The University will offer information sessions, online training, and one-on-one appointments with fund representatives to help faculty and staff understand the upcoming changes. Employees are strongly encouraged to take advantage of those resources, including the 2010 Guide to Retirement Investment Options for Harvard faculty and staff (mailed to all employees at home), and to visit the Compensation & Benefits area of HARVie, Harvard’s employee intranet, for detailed information and updates.