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Google Sets Employees Up for a Successful Retirement

Google sponsors one of the top performing 401k plans in the BrightScope database over the last few years. In fact, Google is ranked 12th in BrightScope’s 2014 Top Plans List (over $1 billion) for the 2nd consecutive year. While its position in the rankings has not changed, Google’s plan has improved every year that it has received a BrightScope rating. Most Googlers can expect to have a comfortable retirement.

 

Google Company Background

Google is an American multinational technology company specializing in Internet-related services and products. These include online advertising technologies, search, cloud computing, and software. Most of its profits are derived from AdWords, an online advertising service that places advertising near the list of search results. The Plan is administered by Amy Chang, who is currently the Benefits Manager at Google. She previously worked at Gap Inc. and McKesson.

 

Retirement Plan Details

The Google Inc. Savings plan has quickly risen to being one of the largest 250 DC plans in the United States with almost $4.8B in assets at the end of 2014. This is a very quick rise from the end of 2009 when the plan had less than $1B in assets. This growth has been driven by contributions from the plan’s thirty-five thousand participants, as well as Google’s generous matching contributions. In 2014, participants contributed over $560M while the company contributed over $250M. Total contributions into the plan in 2014 were nearly $950M.

 

Plan flows chart 

 

During this same period, the total benefits paid out from the plan have grown as well from $24M in 2009 to over $100M in 2014. With net cash flow into the plan approaching $1B per year, Google’s plan is growing faster than any other plan it’s size. 

 

BrightScope Rating

Google received BrightScope recognition as the 12th ranked plan in 2014 and is one of a few plans that has received top peer group awards for 5 years running with a BrightScope Rating of 88, the highest rating the plan has received. The top peer group award is given to plans that are in the top 15% of plans in the peer group as BrightScope recognition of a great plan. Other companies in the peer group include Thomson Reuters Holdings (BrightScope Rating of 80), Verizon Communications (84), and Automatic Data Processing (75). 

 

Rating chart 

Plan Design

Under the plan, participants are automatically enrolled at 10% of their eligible compensation to the plan unless the employee affirmatively elects otherwise. Automatic enrollment is a key driver of participant saving behavior, overcoming employee inertia at the time of hiring. Google adds to the benefit by setting the automatic enrollment rate well above the average initial deferral rate of 3%. In 2010, the initial deferral percentage was 6% of eligible compensation but effective January 1st, 2013, the rate was raised to 10% of eligible compensation. By setting the rate at 10%, the plan encourages participants to save a substantial portion of their income to best prepare for retirement.  

In addition to offering automatic enrollment, Google also offers an employer matching contribution. In 2014 and 2013, the company matched the greater of 100% of a participant's contribution up to $3,000 or 50% of of a participant’s contribution up to $8,750. This translates to employees receiving up to $4,250 from the company for retirement savings. Employees are always 100% vested in these employee contributions, so their is no risk that they will lose some of their employer match if they leave the firm.

Overall, BrightScope feels that the plan is designed in a way that encourages sound participation and deferral behavior from participants.

 

Plan component ratings chart 

 

Service Providers

Since at least 2008, the Company has contracted with Vanguard to act as the plan’s trustee, custodian, and recordkeeper. Because of plan’s low fees and the long tenure common among Vanguard’s recordkeeping clients, we predict the plan will likely stick with Vanguard for the foreseeable future.

 

Investment Menu

Google offers 15 mutual funds, a collective investment trust, and a series of target date funds offered as collective investment trusts. Almost half of the plan’s assets at the end of 2014 were invested in Vanguard target date funds. This is up from less than 20% of assets were in target date funds at the end of 2010. The main driver of this change is the designation of the Vanguard target date funds as the plan’s qualified default investment option (QDIA) and the increase in default rates for automatic enrollment.

 

TDF assets chart 

 

When looking closer at the distribution of the target date assets in 2014, the majority of assets are in the 2040 to 2055 buckets. This is reflective of a younger company as well as most likely newer assets to the plan from automatic enrollment. 

 

Assets by target date year chart 

 

The bulk of the plan’s assets continue to be invested in funds that are proprietary to the plan’s recordkeeper, Vanguard. This is very common on the Vanguard platform, which frequently uses their own low-cost index products on their recordkept plans. In that sense, Vanguard bucks the broader trend BrightScope has tracked of plan’s moving to more open architecture platforms. However, those who choose the Vanguard platform are likely to be philosophically aligned with an index approach and are comfortable with Vanguard products. That said, should Google look to offer more actively managed products in the future, we suggest they look for the best products, regardless of the asset manager.

 In 2009, assets in the plan were evenly split between active and passively managed funds. Ever since, assets have steadily moved towards more passive options.

  

Percent passive chart 

 

The growth in passive assets mirrors the growth in target date assets. With the index target date funds as the plan’s QDIA, we  expect to continue to see passive eat up more and more of the plan, driving down investment costs.

Google is in the bottom quartile of fees for every assets class except Small Cap Stock. The only offering in this asset class is CRM Small Cap Value which has an expense ratio of eight-six (86) basis points for the institutional share class. While still below the median, this is the one area of the lineup where Google is not clearly in the lowest quartile of fees.

 

Google Fee Benchmarks 

 

Potential Watch List Funds

TIAA-Cref Social Choice Equity: Added back in 2008, this fund was a consistent performer but has recently slipped into the bottom quartile of performance within its peer group.

American Funds Growth Fund of America: Added in 2011, this fund quickly attracted assets in the Google lineup, but its recent prolonged underperformance led to it being dropped by over 6,000 large retirement plans (over 100 participants) between 2011 and 2013. The fund has experienced 5 straight years of outflows. 

 

Investment Menu Changes

Google consistently reviews and improves its investment lineup, as evidenced by its frequent modifications to the its investment lineup. Funds are added for diversification, share classes are changed to get lower fees, and active managers are removed when their performance lags. In each of the last two years the plan’s investment committee has dropped an underperforming manager:  the EII Global Property fund in 2014 and the TCM Small-Mid Cap Growth mutual fund in 2013. A full list of changes can be found below.

 

Fund Changes

Year

Added Fund

Removed Fund(s)

Assets as of 2014

Asset Class

2014

None

E.I.I. Global Property

$8M

Real Estate

2013

William Blair Small-Mid Cap Growth

TCM Small-Mid Cap Growth

$16M

Mid Cap Stock

2011

CRM Small Cap Value

Third Avenue Small-Cap Value

$57M

Small Cap Stock

2010

Met West Total Return Bond

None

$33M

Bond Funds

2012

Dodge & Cox Stock Fund

None

$51M

Large Cap Stock

2008

TIAA-CREF Social Choice Equity

None

$49M

Large Cap Stock

Pre-2007

Fidelity Diversified International

None

$98M

International Stock

Pre-2007

Fidelity Low-Priced Stock

None

$57M

Mid Cap Stock  

 

Summary

From increasing the automatic enrollment deferral rate to 10%, to removing underperforming funds, Google has demonstrated a commitment to improving their retirement plan for participants. This commitment is rewarded by the consistent climb in their BrightScope rating, once again reaching a new high in 2014.

BrightScope Editorial
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