Here are three simple, easy, and no-cost (or at least very, very low cost) things I think every Colorado school district should do as soon as possible that will instantly improve the lives of their employees as well as make them even better teachers, administrators, paraprofessionals, bus drivers, or whatever job function they perform.
- Go Single Vendor 401k/457 with PERA
Every Colorado school district is required by law to offer the PERA 401k in the traditional, pre-tax version. They can also choose to offer the 401k in the Roth version, and can opt-in to PERA’s 457 offering in both pre-tax and Roth forms. While many districts do offer the 401k in the Roth version and have opted in to the 457 plan, not all have. I suggest that every Colorado school district should offer both PERA’s 401k and 457 in both the pre-tax and Roth versions and, even further, I think they should get rid of their other 403b/457 vendors. Here are two reasons why.
First, fees matter. As I’ve written about before, the fees charged by 403b and 457 vendors can vary dramatically and can have significant impact on the investment results of your employees. It used to be the wild, wild west with 403b/457 vendors in Colorado school districts, but after some legal advice many districts tightened things up and reduced the number of vendors they offered. While this was undoubtedly a good thing, it’s still not enough. Even districts that have chosen “good vendors” are still giving choices to their employees that could cost them tens of thousands, hundreds of thousands, or even millions of dollars in investment gains over the course of their working and investing career.
For example, as I wrote about previously, Littleton Public Schools has chosen TIAA as a vendor (in addition to PERA’s 401k and 457), and Douglas County School District has chosen MetLife as their vendor (in addition to PERA’s 401k, although they do not offer PERA’s 457). Both TIAA and MetLife offer “decent” administrative fees of 0.34%, at least as compared to some other vendors, and they both offer at least some low-cost, diversified index fund choices among their investment offerings. But, unfortunately, they also offer many high-fee investment and annuity choices, and PERA’s administrative fee is just 0.03% (plus $12 a year) and all of their investment choices are low cost. As a result, over the course of an employee’s career (and even beyond their career, as their investments will continue past the time they retire or leave the district), the impact of those higher fees can be extraordinary. As I highlighted in that post and the accompanying spreadsheet, after 30 years the difference could look like this:
And after 50 years (longer than your employees will likely work, but not longer than their investments will be invested) it could look like this:
And it’s much, much worse if you choose a high-fee investment, or you have a vendor like AXA/Equitable that has much higher fees built-in no matter your investment choices.
Second, there is research that indicates that going with single vendor not only makes it easier from an employer’s perspective to administer the plan, but makes it easier for employees to use the plan effectively. Even AIG (formerly Valic) is now suggesting (pdf) that single vendor is the way to go, listing five distinct reasons (and that’s not even including the fee argument I made above). While many districts will argue that they simply want to offer “choice” to their employees, they are on legally shaky ground if they are offering them bad choices. While school district plans don’t fall under ERISA and therefore may not be at as much legal risk, I think they face an ethical obligation to not offer substandard plans to their employees (not to mention self-interest in making their employees’ lives better). That “free” donut employees get when the sales rep from the 403b vendor visits the staff lounge often ends up being the most expensive donut they’ve ever received.
- Auto-Enroll for New Employees
The second thing school districts should do as soon as possible is setup auto-enrollment into PERA’s 401k or 457 plan for all new employees with an initial amount of at least 3% of salary. There is plenty of research (here, here, and here – pdf) that shows that auto-enrollment significantly increases participation in retirement plans and significantly enhances retirement security for employees. More than 60% of plan sponsors now use auto-enrollment, yet very few school districts do. Employees can, of course, choose to opt-out of the auto-enrollment, or choose to change the amount from the default percentage. But simply by making enrollment the default choice, it can have hugely beneficially effects on employees. Participation rates triple to 91% under automatic enrollment, compared with 28% under voluntary enrollment (Nudge is a great read that talks about default options).
While auto-enrolling in PERA’s 401k plan would be great, I would actually recommend auto-enrolling them in PERA’s 457 plan, because it’s essentially identical except it is much easier for employees to access the funds before age 59.5 if they leave their employer through retirement or job change. This not only allows them to access the funds without penalty if they retire early, but if they change employers it gives them the option to roll over the funds into a low-cost IRA at Vanguard (or somewhere similar) if they choose. This added flexibility is a great feature of 457 plans.
- Auto-Escalate for New Employees
In addition to auto-enrolling employees in PERA’s 401k or 457, school districts should also setup an auto-escalate program. Auto-escalate automatically increases the amount employees contribute to their 401k/403b/457 over a period of time, typically on a yearly basis. So, for example, a school district might auto-enroll employees with a 3% contribution, and then increase that by 0.5% or 1% each year up to a maximum percent (typically 15%). That way employees automatically increase their contributions as their salary increases each year, which increases their savings and investments dramatically over time. Just as with auto-enrollment, that same research supports this and employees can always choose to opt-out of auto-escalation or change the amounts at any time.
All three of these suggestions are simple and easy to implement and are either no-cost or, at worst, very low-cost (an initial minimal investment of time on the part of human resources folks to implement the change). And yet these changes can make dramatic improvements in the financial well being of your employees which, in turn, will make them better employees.
I actually would suggest a fourth thing all Colorado school districts should do, but I didn’t want to include it in the blog post title because it is a bit self-serving. But I think Colorado school districts should seriously consider purchasing a copy of TL;DR: Financial Literacy for Employees of Colorado Public Schools: Optimizing Financial Decisions Based on your PERA and School District Benefits for new employees each year.
Yes, I wrote this and will get a (small) royalty from these sales, but this is a very inexpensive way to help educate your employees about financial literacy in general and specifically about their PERA benefits. Like the three suggestions above, this will likely also result in major improvements to your employees financial lives. So if you are an administrator, superintendent, school board member, or union leader, consider purchasing this book for your new employees each year. It not only will make a difference in their financial lives, but it will allow them to be even better employees because they feel confident in their finances.
Update 4-28-22: I was rereading this post today and thought about something else to add here. While it would be ideal if school districts could match part of employee contributions to their 401k/403/457, I realize that’s not very realistic in today’s budget environment. But what I do think might be realistic is offering a small incentive.
For example, as part of transitioning to auto enroll and auto escalate (or even if they don’t decide to offer this), a district could offer something like a $100 incentive for any employee who contributes $50 a month ($600 a year) to their retirement account (obviously those amounts are just examples). I think most school districts could certainly find a way to do this one time for each employee (particularly when they first start with the district). And I think many districts could do this on an annual basis, for any year that an employee contributes at least $50 a month ($600 in a year), add in $100 to their account at the end of that school year. This would not only encourage their employees to save for the future, but would undoubtedly end up making them even better employees over time as their financial circumstances were improved by this process.