Building a 403(b) Business: Where the Opportunity Lies

In the retirement plan world, change equals opportunity for financial professionals, and change has been a constant among 403(b) plans since the Internal Revenue Service (IRS) passed significant regulations in 2007.


But the biggest opportunity for change right now lies in one key segment of the 403(b) market:  private higher education.  How big is the opportunity?  A LIMRA study released this past May estimates the size of higher education 403(b) plan market to be more than $320 billion.  And the 2013 403(b) Plan Survey (see “403(b) Plan Sponsors Continue to Improve Plan Value”)from the Plan Sponsor Council of America (PSCA) indicates higher education plans are ready for change.

The backstory 

Like many other not-for-profit organizations, private higher education organizations historically followed the typical 403(b) retail model, providing employees access to annuity and mutual fund options from several providers through individual meetings with financial professionals or provider representatives at the workplace. While these personal interactions have served individuals, there have historically been no relationships between financial professionals and plan level decision makers, the people charged with looking out for the plan and the participant base as a whole.

Many institutions of higher education were reluctant to upset the apple cart when implementing changes for the final 403(b) regulations effective in 2009. A variety of financial professionals with various preferences toward providers and products continued to maintain individual relationships with employees who were vocal about maintaining the status quo.  As a result, administrators made very few structural changes and simply adopted compliance monitoring procedures to satisfy the regulations.



Higher education administrators soon learned that monitoring compliance across several unrelated providers was difficult, if not at times impossible and often have resulted in violations of the IRS code.  The well-documented challenges of coordinating loans and monitoring hardship distributions across multiple service providers are just the tip of the iceberg.   Other violations have been occurring. For example, some providers are paying out balances less than $5,000 (per the small account force-out option) when the participant’s total balance across all providers actually exceeds this limit. Additionally, contractual differences between different providers in the same plan are creating discrimination concerns. For Employee Retirement Income Security Act (ERISA) plans, some auditors have been charging large fees for the extra work to consolidate reporting across multiple providers.

Those challenges are wearing on higher education institutions. The latest PSCA 403(b) Plan Survey  shows they are beginning to take a hard look at their plan structures and procedures and are open to making changes. That creates an opportunity for financial professionals with plan experience to step in and help.  A look at results over the past three years from the annual PSCA Survey reveals emerging trends and where the opportunities lie for financial professionals.   

Ready to RFP 

The survey data show the number of higher education plans that have never conducted a request for proposals (RFP) has been shrinking over the past three years.  In 2010, 35.5% of higher education 403(b) plans had never done an RFP. That number continued to decline and in the most recent survey for the 2012 plan year, only 26.1% reported they had never conducted an RFP.   

Many of those who have are overdue to search again.  As of 2012, 40.6% of higher education 403(b) plans reported they had not conducted an RFP in more than five years.  Financial professionals with RFP and plan search experience are in a good position to generate a great deal of new business in this market space.



Too many providers 

The data show higher education plans are moving away from multiple providers to single providers—likely in response to the burdens of working with more than one provider.  The number of higher education 403(b) plans with multiple providers dropped from 56.1% in 2010 to 47.9% in 2012. With nearly 50% still using more than one provider, there is a significant opportunity for financial professionals to point out the advantages of moving to a single provider and help guide the process.   

Less is more 

Financial professionals can also demonstrate value by reviewing the number of investment options offered.   According to the 2013 PSCA survey, the number of options available to participants for their contributions in higher education plans jumped from 55 in 2010 to 65 in 2012. That is more than double the average number for all 403(b) plans in 2012 and opposite the trend in 401(k).  Studies, including one done recently by Columbia University, have shown that too many investment options have a detrimental effect on participation and overall savings rates.   Financial professionals can use their investment analysis skills to help pare down the investment options to a more reasonable menu.   

Capitalizing on the trends 

Clearly higher education 403(b) plan sponsors are in the process of reviewing and making changes to their plans.  They need high quality retirement plan professionals to help.  Because higher education institutions have not historically used financial professionals at the plan level, the first step is to establish your value proposition. You can demonstrate that you understand the marketplace by becoming familiar with the emerging trends.  Use the data from the PSCA survey to gain understanding and share it with prospects and existing clients so they can see how peers are evolving.   

Now is the time to capitalize on this trend. Who knows how long it will be before the next major trend—especially one with this level of market opportunity—arises in the retirement plan marketplace.   

Aaron Friedman is the tax-exempt national practice leader with the Principal Financial Group, an investment management and retirement leader. A noted expert on 403(b) plan design, he has been consulting with tax-exempt organizations for over 20 years and has been in the retirement plan business since 1986. Follow Aaron on Twitter @1AaronFriedman1