Data & Research April 11, 2022

Some 403(b) Plan Sponsors Don’t Have Information Needed to Monitor Fees

A GAO study found a wide range in 403(b) plan recordkeeping and investment management fees.

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The Government Accountability Office has published a report to the chairman of the House Committee on Education and Labor about the 403(b) plan market.

A key finding of the GAO’s study is that fees for 403(b) plans varied widely. The agency surveyed Employee Retirement Income Security Act and non-ERISA plan sponsors and service providers and reviewed the most recent Form 5500 data. It noted in its report that non-ERISA 403(b) plans are not required to file a Form 5500 with the Department of Labor, making it difficult to get information about this segment of the market.

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Plans that the GAO surveyed reported recordkeeping and administrative service fees ranging from 0.0008% of plan assets to 2.01% of plan assets. In addition, fees for investment options offered by plans ranged from 0.01% to 2.37%.

The GAO concluded from its study that 403(b) plans generally have a greater number of investment options than 401(k) plans. However, it noted that some 403(b) plan sponsors indicated they didn’t know the number and details of investment options offered by their plans. According to the report, this occurred among public school system plan sponsors, whose plans are not governed by ERISA, and which often have very little involvement, leaving individual participants and providers to set up individual annuity contracts. For example, representatives from one large school district told the GAO that it listed the names and phone numbers of 27 providers of 403(b) investment options on its website. Each provider might offer multiple investment options with varying expense ratios, and it is unclear from the information how many investment options the school district might offer.

One possible reason for the range in fees is the types of investments offered by 403(b) plans and held by participants. The GAO said that according to Form 5500 data from 2019, the majority of ERISA 403(b) plan assets—$463 billion of $617 billion—were held by plans that reported offering both annuity and mutual fund investment options. Its analysis of Form 5500 data also found that the amount of assets held by ERISA 403(b) plans that exclusively offer annuity products increased from $56 billion in 2010 to $74 billion in 2019, while the amount of assets held by plans that exclusively offer mutual fund products increased from $40 to $64 billion.

The GAO found that large 403(b) plans had lower administrative fees than smaller ones. In addition, university- and state-sponsored plan sponsors and those with $1 billion or more in assets that the GAO surveyed reported taking multiple steps to reduce fees, while other sponsors more often reported not having information that would help them monitor fees. For example, public school district plan sponsors reported that they did not know expense ratios—measures of how much of a fund’s assets are used for administrative and other operating expenses—for investment options offered by their plan.

The agency did not make any recommendations in its report, but it said, “Prior GAO work has shown that even seemingly small fees can significantly reduce participants’ retirement savings over time.”

The report, available here, includes more data about 403(b) market size and plan design difference between ERISA and non-ERISA plans.

Data & Research April 11, 2022

Retirement Plan Participants Want Their Investments to Make a Difference

Fiduciary considerations must still drive environmental, social and governance investment selection.

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Plan sponsors might consider building an investment lineup to meet the growing demand for sustainable options from defined contribution retirement plan participants.  

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Nearly three-quarters (74%) of retirement plan participants said they would increase their contribution rate if offered sustainable investments, compared to 69% in 2021, according to the Schroders 2022 U.S. Retirement Survey. They said they want their investments to be aligned with their values (87%), and that they see environmental, social and governance investments as a driver of performance (78%).  

Deb Boyden, head of U.S. Defined Contribution at Schroders, says the survey supports plan sponsors adding ESG investments to their plans to boost participant contributions and bolster retirement readiness. Plan sponsors should study sustainable investments to include these as options in the plan investment menu, she adds.   

“In terms of building a plan’s investment lineup to meet the growing ESG demand, the first step for plan sponsors is to gain a deeper understanding of ESG, its various concepts and approaches,” Boyden says. “Additionally, it is important to educate, and perhaps survey your participants, to discover what your plan participants’ level of awareness of or interest in ESG is.” 

For the 31% of 401(k) plan participants who have ESG options in their plan, 90% invested in those options and 73% estimate allocating 50% or more of their assets to sustainable investments.

Plan sponsors that are considering adding ESG options must adhere to the same rigorous fiduciary investment selection and monitoring process, Boyden adds. “Any ESG funds included must be based on their economic rationale,” she says. “Engaging with an ESG plan expert may help expedite the process.” 

Plan sponsors will also have to educate participants on ESG investing throughout the process, Boyden explains. “Participant education at the discovery phase, during the implementation phase and ongoing is critical,” she says.

If the plan sponsor selects an investment for the plan based on its ESG attributes, it will need investment managers to provide sufficient data to demonstrate how the fund is promoting ESG and meeting its stated objectives and guidelines. “Once the plan sponsor has a clear understanding of its goals in making ESG options part of the plan offering, an important next step is to ensure the investment policy statement reflects those goals,” Boyden adds.

Schroders’ survey revealed where participants want to make an impact. “While ESG is most often associated with climate or decarbonization, according to our 2022 U.S. Retirement Survey, the top ESG issues for US investors are actually social in nature—focused on workers and communities,” says Marina Severinovsky, head of sustainability, North America, at Schroders.   

When asked for the survey to determine which ESG segments they would like their investments to make an impact on, plan participants that currently invest in ESG, or would if they had the option, said:

  • Employee welfare/living wage: 51%
  • Climate change/global warming/carbon reduction: 39%
  • Human rights: 36%
  • Biodiversity (pollution, deforestation, clean water): 30%
  • Diversity and inclusion: 22%
  • No specific area: 17%

“It’s vital that plan sponsors keep this in mind as the regulatory landscape evolves and more ESG options find their way onto 401(k) menus,” Severinovsky says.

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