Some players in the K-12 403(b) plan marketplace say the traditional model—in which plan participants have individual relationships with advisers and the majority, if not all, of their retirement savings is in individual annuity contracts or custodial accounts—needs a revamp.
Among their arguments, this camp says the traditional model leaves plan sponsors with an unworkable number of retirement plan providers serving the same plan. Participants also have too much choice and responsibility for investments and providers, and investment costs to participants are higher (see “The Need for a Better K-12 403(b) Plan Design”).
But there are others who argue that elements of the traditional model work best for K-12 school districts and their employees. They are not advocating for maintaining the status quo exclusively, but say plan sponsors can find a balance between old and new, and should look at all options to determine what is best for plan participants. Knowledge is power, as Francis Bacon said, and knowing all the options can help K-12 403(b) plan sponsors make the right decisions.
Questions about fiduciary responsibility—whether plan sponsors have a fiduciary responsibility that warrants making changes or whether plan sponsor actions will trigger fiduciary responsibility—have come up in both sides of the arguments about K-12 403(b) plan design.
K-12 403(b) plan sponsors do not have fiduciary responsibility under the Employee Retirement Income Security Act, notes Ellie Lowder, tax-exempt and governmental plan consultant at TSA Consulting and Training Services, in Tuscan, Arizona. She says any fiduciary responsibility comes from state statute, and in most states, there is specific legislation that does not assign fiduciary status to 403(b) plan sponsors.
Lowder worries that some providers are telling K-12 employers they are fiduciaries and are offering to assume responsibilities for them, when for most K-12 employers this is not true. “One of my concerns has been that public school systems, overall, are small and rural and don’t have the staff to assume fiduciary obligations. If they know the truth of the matter, their preference is generally not to put themselves in a fiduciary position, which they can do by choosing investment choices or choosing a provider to ensure compliance,” she says.
“What K-12 plan sponsors do have are compliance responsibilities. They have to make sure Internal Revenue Service rules are complied with,” Lowder notes.NEXT: Addressing arguments about individual annuities
The 2007 revision to the Internal Revenue Service (IRS) regulations for 403(b) plans holds school district plan sponsors more accountable and has caused a lot of consternation looking at the traditional model and trying to balance the interests of participants as well as districts, Doug Wolff, president of Security Benefit in Topeka, Kansas, says. He admits that having hundreds of plan providers, which can occur when participants are able to establish their own annuity or custodial contracts, can be a challenge for both employers and employees.
However, Wolff says there are several very credible recordkeepers thoughout the country that are specialized in 403(b)s and do a good job administering annuities as well as mutual funds. “And, they tend to do so at a very low cost to the districts,” he adds. “As long as providers are able to provide the right type of information to recordkeepers, there are no additional headaches for districts.”
Lowder adds that most K-12 plan sponsors use third-party administrators (TPAs) that provide common remitter services—the employer writes one check, and the TPA distributes the money to the appropriate accounts—and they also monitor compliance limits. She points out that, in many cases, if a K-12 403(b) plan sponsor moves to a single provider, participants will still hold old annuities for which the employer is accountable. “While many old providers will share information, it’s typically not a priority for those that have been deselected. This situation can create more issues for plan sponsors because they cannot force employees to move out of accounts with which they may be happy.”
Wolff contends that 403(b) plans should not necessarily be pushed away from annuity investments in favor of mutual funds, as some have suggested. He says annuities offer participants a chance to get retirement income at a guaranteed rate and a guarantee that heirs will receive death benefits, and they protect against market volatility. “Annuities are more expensive [than mutual funds] because participants get more benefits,” he says.
Even in the wider defined contribution (DC) plan market, plan sponsors have moved from focusing on accumulation to retirement income, and the government has issued guidance and regulations to encourage annuities.NEXT: DC participants want advice
A recent study found 88% of participants want one-on-one education about their retirement plan, and 96% want personal advice during enrollment. Lowder says giving employees a retirement packet or holding a group education session and asking them to enroll in their retirement plan online may be good for about 15% of participants she calls “self-starters,” but the other 85% want more. In the K-12 market, there isn’t usually the motivation of employer matching contributions, so the face-to-face with advisers drives higher participation, she contends.
In addition, while other retirement plan sponsors have the ability to automatically enroll participants into retirement plans, for many K-12 plan sponsors, this is not the case.
“There are many considerations when deciding the best model for a 403(b) plan, but what plan sponsors have to care about most is the outcome for participants,” Lowder says. “If the face-to-face adviser service model motivates employees to save for retirement, who’s to say it is too costly?” In fact, Lowder challenges those who advocate for mutual fund-only plans to do a comparison of costs. There are a few websites that offer comparisons showing that commission-based investments can be less costly than fee-based investments.
“I think depending on built-in assumptions, especially how long someone is going to hold on to investments, you can make an argument that buy-and-hold type investors will incur less fees in commission-based investment than fee-based over the long-term,” Wolff says. However, he warns that arguments can be made quickly that challenge the assumptions used.
Considering participants’ desire for advice, plan sponsors in the wider DC market are turning to solutions that meet this demand, and participants, in most cases, must pay more for them.NEXT: A balanced plan design
“403(b)s are only allowed to use mutual funds and annuities as investments. I think they should offer both,” Lowder says.
Wolff thinks so too, and he believes plan participants like having choice. “I think plan sponsors should be thinking about offering some element of choice, but it should be rational, not a copious amount of providers,” he says. According to Wolff, when looking to remove a provider, plan sponsors should consider how many employees are invested with it and what are the implications of removing it, as well as whether it will cause any unnecessary confusion or worry for participants. When adding to the list, plan sponsors should be able to make sure the provider will be able to deliver the necessary information to the recordkeeper or TPA.
He also says K-12 school districts should consider whether there will be enough assistance through providers to help employees. He notes that many K-12 school districts have decentralized human resources departments, and there is not a lot of help for employees—one reason why the current model has held up. Financial professionals enforce the importance of saving early and walk employees through different life stages up to retirement. In Wolff’s experience, single-vendor, mutual fund-only models do not include face-to-face interaction with trusted financial professionals.
“Yes, plan sponsors need to have their role made easier, but it all comes down to how to best benefit employees,” Lowder concludes.