Lessons from a Retirement Savings Plan Titan
The University of California’s (UC) retirement savings plan is the second largest in the United States. The size and diversity serves as a microcosm of the larger public and provides the UC a unique perspective on the challenges facing Americans saving for, transitioning to, and living in retirement.
With great scale comes great responsibility, and the UC is rising to the challenge by developing best practices for the savings and draw down phases of retirement.
Empowering participants to prepare for and experience the retirement they deserve is a driving objective for so many engaged plan sponsors. One organization that stands apart from the rest—both in plan largess and commitment to its participants—is the University of California (UC).
The UC is vast, spanning 10 campuses, 5 medical centers, 3 national energy labs, and an array of agriculture and natural resource centers. Reflecting this scale, the Office of the Chief Investment Officer (CIO) oversees almost $120 billion in assets across pension, endowment, working capital, and defined contribution pools. The defined contribution (DC) plan covers over 300,000 participants, totaling $24 billion in plan size—the second largest public entity plan, with the largest belonging to the US Federal Government.
The uniqueness of the University’s retirement savings plan size and diversity—almost a microcosm of the larger public—provides the Office of the CIO with a perspective on the challenges facing Americans saving for, transitioning to, and living in retirement.
As an academic juggernaut, the UC isn’t merely observing potential participant pitfalls; it’s harnessing its culture of innovation to explore solutions to looming retirement risks—most significantly, longevity risk.
The defined contribution plan covers over 300,000 participants, totaling $24 billion in plan size—second only to the US Federal Government in terms of assets under management.
For the rising generation of retirees, the prospect of spending decades—not years—in retirement means savings have to last longer. It becomes even more complicated as greater numbers of employees in the United States come to rely on retirement income primarily from DC sources. This construct shifts the responsibilities of saving enough, investing wisely, and strategically drawing down funds to participants. While the UC continues to offer a defined benefit (DB) plan, with the vast majority of participants having access to it, the University recently introduced another layer of choice. In 2016, the UC began offering new hires the option of a pure DC plan, called Savings Choice, as their primary retirement benefit. In supporting this model, the UC is committed to equipping participants with the tools to successfully plan for their retirement.
To begin, the UC mandates new hires that have opted for Savings Choice to save at a healthy rate. Currently, employees must contribute 7 percent and also receive an 8 percent contribution from the University. With an average voluntary contribution rate of 10 percent, UC employees could be saving up 25 percent, nearly 3 times DC saving averages.2
The UC has a dedicated effort to deliver encouraging, easy-to-understand, and ongoing employee communications in order to create a culture of savings. This messaging helps to educate participants on the full breadth of their investment options, which the UC has curated to help enable meaningful wealth accumulation. From default target date funds (TDFs), to a core line-up of 12 active and passive funds, to a brokerage window, UC not only gives participants access to a variety of investment approaches, it also offers an extremely competitive average management fee—0.07%—for the core fund line-up, enabling participants to pay less in fees and gain more in their portfolios.
Even the most responsible savers can feel the strain of the retirement transition, thanks to longer lives and earlier workforce exits.
For new employees having elected Savings Choice, drawing down those savings to last throughout retirement is still unsolved, though the University of California has an idea. The Office of CIO can envision a deferred annuity built into a TDF. At the point of retirement, participants will buy, unless they opt out, this annuity with a portion of their savings—allowing them to maintain liquidity for the near term, with the peace of mind that guaranteed income* will be available when they need it most, say at 75 or 80 years old.
Even the most responsible savers can feel the strain of the retirement transition, thanks to longer lives and earlier workforce exits. The University of California is looking to innovate the retirement savings and drawdown experiences with forward-thinking investment products, replacing the friction caused by changing demographic dynamics with a seamless shift to retirement readiness…and beyond.