With the recently announced purchase of Sparrow Health System by the University of Michigan (U of M), many employees of Sparrow more than likely have questions regarding a variety of issues, including their retirement accounts. Although we don’t know much yet about the timeframe of this change, we do know some about what your retirement account may look like once this merger is complete.
As a financial advisor advising clients at both Sparrow and U of M, I have an intimate knowledge of the retirement plan investment options available at both institutions. It's difficult to know with absolute certainty everything that Sparrow and U of M will do with regard to this merger. I can provide a comparison of the investment options in the retirement plan that is offered at Sparrow vs. the options at U of M.
Sparrow, as you are likely aware, uses Transamerica to administer their 401k and 457 plans. The investment options at Transamerica are, in my view, somewhat limited. There are only 16 investment options, of which seven are target date funds leaving only nine asset class specific funds. In my opinion, the cost of these funds are also high. For example, the Transamerica Stock Index R4 has an expense ratio of .30%. This fund is meant to essentially clone the S&P 500, which there are many funds that track. Any investor outside of the 401k plan could purchase an S&P 500 for a mere .10% or less. This means that the S&P 500 fund in the plan is 3x higher than it should be!
The Transamerica/Sparrow plan does have a nice feature which is the (Personal Choice Retirement Account) PCRA. This feature allows participants to move some of their funds from Transamerica to Schwab, where they can invest in a much larger menu of investment options. Although this is a great feature, in my experience, very few participants utilize this feature.
In my opinion, the retirement plan options at U of M are far superior. To start, participants may choose their provider. U of M uses both Fidelity and TIAA Cref to administer their 403b, 457, and 401A plans. Participants can choose from the two providers or use both. Once you have selected a provider, you are greeted with many more investment options at a much more attractive fee level.
When looking at investment options at U of M via the TIAA Cref 403 b plan, participants will see over 60 investment options. Compared to the 16 options at Sparrow/Transamerica, the options are more comprehensive and lower cost. For example, there is a large cap index fund available that is very similar to the Transamerica S&P 500 fund that has an expense ratio of just .02%! That is less than 10x the cost of the Transamerica fund!
In my opinion, the Fidelity 403 b plan at U of M is also superior. The plan has over 180 investment options! There are funds for nearly every asset class and very competitive fees. The plan provides a true S&P 500 index fund with a .02% expense ratio.
I know that there are likely many more questions about this transition than what can be answered right now. However, employees at Sparrow can at least know that their retirement plan options are going to get a massive improvement when this transition takes place. FSG will be available to chat through these options with all of our valuable Sparrow community members.
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