The regulatory overhaul has pushed employers in some segments of the 403(b) market to limit the number of vendors servicing their plans. That, in turn, has caused plan participants in at least one segment of the 403(b) market to stop contributing to their plans.
403(b) plans 101
For the uninitiated, 403(b) plans are only available to 501(c)(3) organizations, or nonprofit organizations, and they were originally developed as a supplemental savings plan to traditional pensions, also known as defined benefit plans.
"You can break down the market to higher education, health care, the K-12 market, charitable organizations and churches as the big-bucket markets that 403(b)s serve," says Alessandra Hobler, an analyst with Cerulli Associates, a financial services research firm.
Though they're often lumped together with 401(k) plans, 403(b) plans can differ significantly from their for-profit counterparts -- and from each other.
Industries that have moved away from defined benefit plans, such as health care industries, typically run 403(b) plans in a similar fashion to 401(k) plans. They give employees access to one plan provider that offers a selection of investment products. But in the K-12 public school system, the retirement plans are wildly different. Elementary and high school teachers who invest in a 403(b) have access to as many as two dozen different plan providers, and they're pretty much left on their own to figure out with whom they should do business.
Before the new regulations were put into place, 403(b) plans in the K-12 market consisted of a jumble of individual annuity contracts negotiated between the participant and the provider of their choice.
The plan sponsors, or employers offering plans, were very hands-off and nearly extraneous to the transaction. For instance, a school might have simply opened its gym or teacher's lounge to dozens of vendors, who would then market directly to teachers and faculty.
Participants could choose the provider they liked and then arrange contributions, loans and withdrawals directly with the investment provider.
Now participants must go through the plan sponsor to do things such as change the amount of money deferred or request loans and withdrawals.
"Everything now has to flow through the sponsor, so the entity sponsoring the plan can keep up with these (Internal Revenue Service) limitations. Participants can't just go on their own and decide which provider they want to use," says Rebecca Moore, senior editor at PlanSponsor.com and managing editor of PlanSponsor's (b)lines newsletter.
The new regulations require that plan sponsors track and report participant contributions, loans and withdrawals to the IRS. For plans that include potentially dozens of providers, that amounts to an administrative nightmare.
"They have lots of vendors but are required to aggregate that data across the vendors. That is just becoming too much for them to do in some cases. So they have to slim down their offerings so that, from a compliance standpoint, they can say 'this participant is contributing the allowed amount, and they are only taking out one loan -- not 40,'" says Cerulli's Hobler.
Daunting logistical issues aside, some of those providers are unable or unwilling to share information with plan sponsors.
As a result, some school districts are condensing provider options, from upward of 100 to mere handfuls, according to a recent study by the American Society of Pension Professionals and Actuaries' Pension Education and Research Foundation.
But it's not just the recent regulations that are affecting 403(b) participants' choice of providers. State-specific legislation aimed at corralling costs and streamlining 403(b) plans are also a factor.
"In Southern California, 403(b) regulations caused the reduction in the number of choices. But in other places, legislation would reduce the number of choices in school districts. So it's several factors that reduce the choices, not just regulations," says Debra Davis, assistant general counsel and director of government affairs at ASPPA.