Ready for a New Market?

Nonprofits and other sponsors of 403(b) plans need the fiduciary and investment expertise of specialist retirement plan advisers.

Art by Doris Liou

There are many opportunities for retirement plan advisers to serve 403(b) plans, experts say. Furthermore, 403(b) plan sponsors tend to be more loyal than 401(k) sponsors and, therefore, could be a coveted client base.

“Due to the heightened litigation in the 403(b) market in the past few years, I believe the opportunities are greater now than they ever have been,” says Brodie Wood, senior vice president and national practice leader for health care, education and not-for-profit markets at Voya Financial. “403(b) plan sponsors are very receptive to help to improve their benefit programs. They want support from a third party with fiduciary best practices and to modernize their programs.”

Wood says he likes to use a baseball analogy to describe the development of various segments of the retirement plan marketplace, suggesting traditional 401(k) plans “are in the ninth inning” in terms of their development and embrace of best practices. He says 403(b) plans run by health care organizations are in the seventh inning, while those of higher education entities are closer to the fifth inning.

“Maybe half of them are working with an adviser, and they are halfway there in terms of understanding best practices,” Wood suggests, noting that he often has discussions with advisers curious about the 403(b) market. “The first thing I tell them is that the 403(b) market is not so very different from the 401(k) market that they should want to shy away from it.”

Wood says any advisers who are starting to work with a 403(b) plan should focus first on helping clients understand the fiduciary process and the importance of having an investment policy statement [IPS]. They should also be taught about the importance of naming a formal committee that will evaluate investments, fees and plan design.

Wood then tells advisers about the differences between the various types of 403(b) plans. “Among health care providers, there have been many mergers and acquisitions [M&As] resulting in cumbersome structures, so they need help rationalizing plan design,” he says. “They need an adviser to help them evaluate the cost of the resulting multiple providers and to evaluate the cost of investments. They also need the help of a 3(38) or 3(21) fiduciary investment adviser. There are some of the basic areas where advisers can add a lot of value.”

Paternalism and participant education

In the education and nonprofit market, “there is a unique appetite for participant education,” Wood continues.

It is also important for advisers to realize that many 403(b) plans do not have advisers and that the relationship might start off with a small project—but then potentially lead to being put on formal retainer.

One of the great benefits of working with 403(b) plans, Wood says, is that these “plan sponsors are more paternalistic towards their participants and more loyal to their advisers. Once they understand the value of their adviser, it really resonates with them. Things that are taken for granted in the 401(k) world are revolutionary to them, like an investment policy statement.”

Breaking into the 403(b) market

Charlie Cammack founded Cammack Retirement Group more than 50 years ago to specifically serve the 403(b) market, says Mike Volo, senior partner. Today, “in the larger end of the market, where we do a lot of business, there seems to be a small group of experienced advisers serving these plans,” Volo says. “But in the smaller end of the market, there are opportunities for advisers.”

Plan design is a clear area where 403(b) plans need advisers’ expertise, particularly with implementing automatic enrollment and deferral escalations, says David Hinderstein, president of Strategic Retirement Group Inc. “This is the biggest area where 403(b) plans need help,” Hinderstein says. “The second is to benchmark and upgrade provider services. These plan sponsors have not been as diligent as 401(k) plan sponsors and are paying higher fees.”

“Advisers are particularly adept at making investment recommendations and putting together fund lineups where the fees have been scrutinized,” says David Kaleda, a principal in the fiduciary responsibility practice group at Groom Law Group. “Cases that have been brought against 403(b) plans also highlight another area where advisers are helpful, and that is establishing an IPS, procedures on how to run a committee and prudent processes.”

And while a lot of 403(b) plans are governmental plans not subject to the Employee Retirement Income Security Act (ERISA), they are still subject to state laws that are very similar to ERISA, Kaleda says. The tricky part of handling governmental plans that advisers need to keep in mind, he says, is that “every state, county and local government has their own laws.”

Stuart Herskowitz, senior vice president of client relations at Hooker & Holcomb, also says the governmental space is more complicated, adding, “The non-ERISA marketplace requires an amazing amount of time to serve. You are dealing with multiple personalities, with unions, with the dynamics of each town. You need to be methodical in how you deal with this marketplace. Advisers have to be prepared for the upfront investment.”

Advisers can also help 403(b) plans educate participants about the value of their employer matches, “which tend to be a little bit richer than 401(k) plans,” says Joe DeBello, a retirement plan consultant with Chepenik Financial. “Without the proper education, it is difficult for the plan sponsor to drive home the value that contribution delivers to their participants 10, 15, 20 years from now,” DeBello says. “Helping participants understand that value instills confidence in their employer.”

Finally, DeBello says, the health care and higher education industries are growing at a fast rate: “We want to be where the growth is.”