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K-12 403(b) Model Needs a Mix of Old and New

K-12 403(b) plan participants have long enjoyed the personal touch of meeting with advisers one-on-one, but plan sponsors could use a nudge in using lower-cost investment options.

By Rebecca Moore editors@assetinternational.com | December 15, 2016
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Recently, articles in the New York Times focused on what it called problems with 403(b) plans for K-12 public school districts.

K-12 403(b) plans often have annuity contracts, thousands of investment options and hundreds of providers in which individual participants have directed their deferrals and savings into providers they picked, often after the sales rep visited the workplace. As the most recent Times’ article pointed out, these sales calls often led employees to purchase retail-type products with large sales charges, and/or annuity products with long and potentially confusing contracts and what was later found to be requirements to keep their money there for good.

The articles argued that fees were one of the problems associated with K-12 403(b) plans.

Ellie Lowder, tax-exempt and governmental plan consultant at TSA Consulting and Training Services, in Tucson, Arizona, shared her thoughts with PLANADVISER.

PS: When selecting investment options for their retirement plans, are employers, who seek the lowest available fees, meeting their fiduciary obligations?

Lowder: Not if fees are the only focus, according to the Department of Labor. “Higher investment management fees do not necessarily mean better performance,” says A Look at 401(k) Plan Fees, published by the DOL and Employee Benefits Security Administration in 2013. The publication goes on to advise, “Nor is cheaper necessarily better. Compare the net returns relative to the risks among available investment options. And, finally, don’t consider fees in a vacuum. They are only one part of the bigger picture including investment risks and returns and the extent and quality of services provided. Keep in mind the importance of diversifying your investments.”

NEXT: Tradeoff of focusing only on lowest cost