Shakeout in 403(b) plans affects teachers

Fallout of fewer choices

The K-12 market is a bit of an anomaly in the 403(b) marketplace. They still have a defined benefit, or pension, plan and contributions to retirement accounts are supplements to the pension. Because of that and the high percentage of participant funds in individual annuities, it will be slow to transition to a structure that is more similar to a 401(k) plan. However, employee education may be the key to keeping participants engaged as the industry transitions.

ASPPA's study examined the repercussions in school districts that deselected many of their 403(b) providers. It found that many participants dropped out of 403(b) plans when their provider was no longer an option.

"There was a decline by 19 percent in participation, and that could be for a variety of factors," Davis says. "For participants whose providers that were deselected, participation decreased by three times as much, by 56 percent, so it was a very significant decline in participation when their providers were deselected."

Davis says it's not clear from the ASPPA study why participants dropped out of their plans after their providers were deselected.

"Other research shows that participants have varied preferences about how they want to receive assistance, and we hear anecdotally that participants have relationships with advisers that they trust. And when they are no longer available, some will seek out other advisers. But others may not or may take a longer time to do that, and that could account for the decline in participation," she says.

Carl Steinhilber, national nonprofit practice leader for the nonprofit market at MassMutual, reports that in their work with 403(b) plan sponsors, participation often increases after consolidation -- although they work with different types of plans.

"Our focus is ERISA 403(b) plans, and school districts are exempt from ERISA -- and school districts are multi-multi vendors," he says.

ERISA refers to the Employee Retirement Income Security Act of 1974, complicated federal regulations designed to set standards for retirement plans in private industry to protect individual workers.

Nonetheless, educating participants on the benefits of consolidating plan providers keeps workers contributing to their retirement plans through the transition process.

"It comes down to the communication program, and it could also come down to how many vendors you are consolidating from. If you are trying to go from 10 vendors to one, that can maybe complicate the communication process a little bit," he says.

School districts may have many more than 10 vendors to try to consolidate and long histories of being very hands-off when it comes to their retirement plans.

"Obviously, the best case would be to try to avoid reducing investment providers unless it's necessary," says Davis. "The 403(b) regulations could result in situations where the school districts need to reduce the number of investment providers if they're not willing to share information. In those situations, education is really critical in terms of disclosing to participants that they need to select a new provider and giving them information on what is available to them to let them pick the provider that's right for them."

In the future, 403(b) plans will likely continue to increasingly resemble 401(k) plans, with a trend toward offering less expensive institutional share classes of mutual funds, other products with lower fees and group annuities rather than individual annuity contracts.

ASPPA, in conjunction with the National Education Association and The National Tax Sheltered Accounts Association, has released a model disclosure form to make the process of selecting an investment provider easier for public school 403(b) plan participants.

The form provides "key information to the participants, the fees to be charged and what types of services are available. It's designed to let participants make an apples-to-apples comparison of the investment products available to them," Davis says.


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