Re-Engineering II Analysis - NYU



Re-Engineering II Analysis

Outsource Administration of NYU’s Retirement Plans

I. Current State

a. Defined Benefit Plan Administration

Currently, New York University[1]has one defined contribution retirement plan. New York University’s Staff Pension Plan, which is a defined benefit plan, has 3844 participants. This plan covers employees under the Local 3882 bargaining agreement (Office & Clerical employees) as well as Security Officers under the Local One contract. There are 1,929 active participants and 1,503 participants with deferred vested benefits. There are 412 retirees under the plan receiving benefits. Currently, the NYU Benefits Office provides plan administration services for the plan, including benefit calculations and preparation of valuation data, as well as required plan communication, and government compliance reporting. Actuarial funding and accounting valuation work is performed by Mercer; Mercer also audits of benefit calculations when a person is about to receive payment from the plan. JP Morgan Chase is the trustee and administrator of retirement benefit payments under the plan. However, the NYU Benefits Office maintains the data in the JP Morgan Chase benefit payment system. The plan is not heavily transactional in the years while an employee is earning a benefit. The work benefit calculations and vesting determinations is labor intensive because it requires a complete review of a person’s career employment records, including time worked at other entities that are part of NYU. PWC is the plan’s auditor.

Cost savings analysis: Plan in the Outsourced Environment:

• After “go live”, fee to JP Morgan Chase is $50 per participant per year

• Based on current participant count of 3844, annual cost = $190,200 per year ongoing; this is fully chargeable to the Staff Pension Plan trust fund

• Price guarantee: 5 years

• Annual Staff Time Savings = $89,950 (this is based on estimated plan admin hours of 300 persons serviced, average service length 7 hours @ $40 average per hour cost of service.* This number has been adjusted upward slightly because of NYU staff reductions the calculation volume would increase.) Note that hours of service per case is long because although the plan is not highly transactional over a person’s career, at the point of employee separation there are required vesting and benefit calculations. At this point the plan is manually labor intensive. Most employees require consultation in person on optional forms of benefit payment, contingent annuitants, and some request more than one set of model calculations before selecting an option. This will move to the self service environment with JP Morgan Chase. Current cost is charged to Fringe Benefit pool.

• Mercer Calc Audit Savings = $150,000

• Mercer Valuation Costs (funding and FAS 87 accounting (both required) : Unchanged (charged directly to Plan Trust)

• PWC audit costs (part of University-wide contract): unchanged

• Total savings: $150,000 + 89,950 =$239,950 less $190,200 = $49,750 (all savings accrue to fringe pool) when outsourcing is fully implemented.

*Labor: $89,950 is the equivalent of 1.27 FTE at base salary of $55k + fringe overhead. However, because this plan is not heavily transactional, all benefits specialists are cross trained to handle the plan calculations and the work is distributed among the 4 benefits specialists positions. Thus, by itself, this outsourcing does not allow for any reduction in staff.

b. Defined Contribution Plan Administration

Currently, New York University has five Defined Contribution Retirement Plans. The University provides the NYU Retirement Plan to its faculty, administrators, and professional research staff. The University maintains a separate 403(b) Retirement Plan for its adjunct faculty pursuant to the UAW Collective Bargaining Agreement. The university offers the Supplemental NYU Retirement plan, a voluntary plan to which only employee contributions are made, to all its employees. Additionally, there is a frozen 401(a) plan pursuant to the previous collective bargaining agreement with Local One Security Officers, and there is a non-qualified 457(b) plan for senior level employees whose compensation exceeds $160,000. Currently, the NYU Benefits Office provides plan administration services, communication, and compliance testing, as well as support for plan distributions, loans and hardship withdrawals. The plans allow participants to select from a menu of over 100 mutual funds made available by two investment companies Vanguard and TIAA-CREF. NYU collects all the enrollment forms, enters data into the HR information system, and then enrollment data moves electronically to the selected vendor (s). Because of the dual investment company scheme, many processes require NYU Benefits Staff to either aggregate data, or review actions with two vendors. These plans are highly paper intensive and transactional. There is no employee self-service functionality other than at the investment fund selection level within each investment company.

Cost Savings Analysis: Costs Associated with Operating Current Defined Contribution Plan Administration

• Based on the current fund lineup and the amount of money invested in the Plans, (combined with NYU Medical Center and Brooklyn Poly) over $3 billion in assets under management generates approximately $15.4 million in expense revenue.

• NYU can leverage this expense revenue to obtain enhanced employee self service as well as an online website and call center support. In addition, by reducing the fund lineup NYU will be able to obtain better share classes providing greater returns to employees.

• The Defined Contribution plans are highly transactional in nature. In 2008 – 2009 12 month period these plans generated 5900 HRIS transactions performed by benefits staff. In addition, they generated at least 3200 calls. Valuing these at time spent as 15 minutes per transaction and 6 minutes per call yields savings of : $71,800.

Labor: This is equivalent to 1.11 FTE’s. Again, since the employees are cross-trained, there is little opportunity for a reduction in benefits staff.

NYU does not pay fees to the current vendors. They cover their costs through the expense load in the funds.

II. Best Practices/Benchmarking

NYU has already selected JP Morgan Chase as NYU’s defined benefit plan administrator, and the NYU Medical Center has also selected JP Morgan Chase to administer its two defined benefit plans. The transition to outsourcing the NYU Staff Pension Plan (Washington Square) should be completed by April, 2010.

Some of the benefits of outsourcing the defined benefit plan are:

• Benefit statements will be provided to employees and terminated vested participants in a self-service environment; current statements are provided upon request only

• A reduction in benefit calculation error risk, since this will be performed by the vendor, hence reducing liability to NYU

• Administration of all defined benefit plan participants across all NYU defined benefit plans will enable more accurate tracking of vesting and benefit service within the group, reducing legal liability.

• Tracking service and hours on JP Morgan Chase’s Pensmart platform might serve as repository of information for other workforce planning needs.

Defined Contribution Plan administration is more transactional in nature when compared with other HR functions, such as compensation administration or performance management.[2] It is also highly consultative in nature, as employees want to understand the implications of plan participation on their paychecks, their taxes, their retirement income, their spouses, etc. There are many and complex rules on how much an employee can contribute, as well as rules on distributions, hardship withdrawals, and loans. All of these made the Defined Contribution plan call volumes, as well as walk-in volume, fairly high when compared to the other NYU Benefit Plans with the exception of Medical Benefit coverage. While it is common for our peer institutions to administer these plans with multiple investment companies and University HR serving as the coordinator and service front end, some schools are beginning to rethink the process so that they can benefit from the greater self service which can be provided by a sole record-keeper.

NYU has also recently sent out a RFP to several potential vendors to become the sole provider of defined contribution benefits administration. It is hoped that a selection of a vendor can be made by calendar year-end (12/31/2009), a one-vendor provider can be operational by Summer 2010.

Some of the benefits of outsourcing the defined contribution plans are:

• By using one vendor, NYU can leverage the plan’s expense load (paid by participants) to provide web support, call center and best in class fund lineup.

• Elimination of paper enrollment process

• Elimination of benefits office paper handling, disbursement of forms, and data entry into the HR information system (HRIS)

• Elimination of forms maintenance on Web and forms and kit warehousing

• Elimination of forms in NYU benefits files (reducing scanning costs)

• Default enrollment eliminates follow up on employees with incomplete paperwork

• Process redirects education and advice role to the vendor; questions about the plan features can be directed to vendor call center

III. Analysis and Options

The University has already moved forward with the outsourcing of the administration of its retirement plans. Given the efficiency and economic benefits (to plan participants in particular), these plans appear to be optimal and should continue to move forward. While there are not significant hard dollar savings to the University with either outsourcing, they do relieve the current burden on the benefits office, potentially allowing for an eventual reduction in the number of NYU-employed benefits representatives. This issue is addressed in a separate report, but these issues are clearly inter-related.

Attachments:

NYU Benefits Defined Benefit Plan Administrative Efficiency Solution for 2010 and Beyond, April 30, 2009 (Prepared by NYU Benefits Office)

Reengineering II: More Opportunities for Self Service, July 30, 2009 (Prepared by NYU Benefits Office)

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[1] Excluding the Medical Center

[2] Towers Perrin Report, p.9.

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