Moving Ahead: Lehigh's Retirement Plan Transition

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Tuesday, April 16, 2013

What kind of investor are you? Do you prefer to “set it and forget it,” or are you the type who likes to research mutual funds and take a few risks for the possibility of a higher reward?

At Lehigh we have about 1,700 benefits eligible employees – that’s a lot of retirement savers. And, if you look around your office, you soon realize that we’re a workforce at many different life stages, facing a range of different circumstances. As the university designs its new retirement plan, finding a way to satisfy the needs and preferences of this diverse group of people has been a top priority.

This month in Moving Forward, we’re introducing two more members of the Retirement Plan Investment Committee who discuss  some outcomes of the investment structure and asset class decision–making process. Next month we’ll share more news about the selection of the company that will serve as record-keeper for the new retirement plan.


What Are Investment Structure and Asset Classes?

Part of the role of the Retirement Plan Investment Committee is designing what is known as theinvestment structure. An investment structure is an essential component of a defined contribution retirement plan. The committee, working with The Mercer Group, carefully contemplated how best to design the plan so that the widest range of investors will be able to find an appropriate level of sophistication, risk and investment involvement. 

Within the investment structure, a variety of asset classes will be offered. Asset classes are the types of investments available. These include things like equities (stocks), bonds, and real estate. Within the asset class of equities, these are further divided by the size of the company, and by whether they are from the US or from outside the US.

Asset classes will be offered for investment in the new retirement plan via mutual funds. In other words, you won’t be buying shares of an individual stock or individual bonds. Rather, you’ll purchase shares of a mutual fund that is invested in the asset class.


The Lehigh Retirement Plan’s Investment Structure

Retirement Plan Investment Committee member Dave Hammer is a CPA and Lehigh’s Associate Treasurer. He has been at Lehigh for about fifteen years and his work includes assisting with the oversight of the non-endowment investments of the university.

Dave HammerDave likens the tiers of the investment structure to a series of doors investors can walk through. “These doors offer a menu of options that will really accommodate every age and level of investment risk comfort,” he explained.

“The first door offers a very hands-off approach,”said Dave. “You can select from Lifecycle Funds, and there will be several to choose from depending upon your targeted retirement date.”

Another committee member, Corey Galstan, is Lehigh’s Director of Public Markets. While he’s been at Lehigh just over a year, Corey is a Chartered Financial Analyst (CFA) and brings significant institutional investment experience.  He says the Lifecycle Funds are the “set it and forget it” option that allows a reluctant investor to make just one decision. 

Corey Galstan“These funds are based on your target retirement date, so their asset allocation does change over time,” he said. “They will also be the default designation for employees who don’t indicate a choice when enrolling in the plan.”  

For employees looking for a bit more control over their investments, the second and third tiers offer more doors with more funds to walk through.

“There will be passively managed and actively managed funds in this tier,” Corey noted. “A passively managed fund would be something like a fund that contains the same securities (stocks) as the S&P 500 or Barclays Capital Aggregate Bond Index.  These are also sometimes called index funds.”

Corey says that in these second tier funds, the fund manager makes limited trades with the stocks that are only based on what the index they mimic does. “This keeps fees lower since there are fewer trades and less direct management of the fund,” he explained. They are also a bit easier for the average investor to understand and monitor since the major indices are reported about every day in the media and you can expect your index fund investments to grow at the same rate.

In contrast, the third tier includes actively managed funds where the fund managers make transactions based on research and expertise. “These funds can produce higher returns, but they also have a higher level of risk and also higher fees,” Corey said.

Dave says both kinds of funds will offer a diverse range of options. “All of the funds will also be reviewed by the Retirement Plan Investment Committee on an ongoing basis to ensure they are performing well and their fees are still at an appropriate level,” he said.

A number of different asset class options will also be available within the actively managed third tier. “We wanted to add in some inflation protected investments, such as Treasury Inflation Protected Securities (TIPS) and Real Estate Investment Trusts (REITs),” Corey said. “With all of the funds that will be offered, you will also be able to adjust the amounts of your investments that are in US funds versus funds outside of the US,” he added.

The fourth tier of the investment structure is for the very active investor. “This is where someone who really wants to get their hands into their investments can do so,” Corey said.

Dave explains that this tier offers a “Mutual Fund Window.” This is a place where people can purchase shares of mutual funds that aren’t included in the core retirement plan. “If you don’t find what you want behind the doors in tiers 1, 2 or 3, you can go in and buy things there,” he said.

According to Corey, “There will also be a social choice fund option in the fourth tier for those who are looking for investments that align with their values.”

“The tiers are a jumping off point,” Dave continued. “You can decide how much of your retirement contributions to put into each level.”


Focused Choice

If all of this sounds like a lot of complexity, keep in mind that the current system is much more complicated.  Right now, between the Lehigh Retirement Plan managed by TIAA-CREF and the four Voluntary Retirement Savings Plan vendors, we have over 350 investment options. That level of choice is simply overwhelming for most people.

“The new plan will offer a lot of choice, and the option to be as active or as passive of an investor as you want,” Dave notes. “But it’s not going to be overwhelming, because each asset class will have just a small number of managers who have been carefully selected. I think the plan will appeal to the more sophisticated investor as well as the most hands-off and everyone in between.”

Corey believes having these focused choices will benefit employees at every life stage. "It’s going to give you ample opportunity to build a low-cost diversified portfolio that can help you meet your retirement goals,” he said.