Greater Plans
This is echoed by Blake Thibault, Vice President, Heffernan Financial Services, all of whose 403(b) plan clients are 501(c)(3) organizations, who said his firm views its services as for the greater good of helping these entities and participants understand their plans and save for retirement.
Like all 403(b) programs going through changes because of revisions to the regulations governing the plan, nonprofits are in need of help. However, as each tax-exempt entity and employer group, such as K-12 school systems, higher-education institutions, nonprofits, and religious organizations, has certain unique characteristics, it would be a mistake to assume blithely that advisers need only redirect their 401(k) practices to the tax-exempt space.
Partly as a result of the rules changes, in addition to giving back, advisers may want to get into advising the nonprofit space because there is huge market opportunity, according to M. Palmer Whitney, National Managing Director, Nonprofit Market, MassMutual Retirement Services Division, which has a nonprofit block of business of more than $3 billion and 550 plans. Whitney says the nonprofit segment is more than a trillion-dollar marketplace, when also taking into consideration the 401(a) or 401(k) companion plans offered by many nonprofits so their 403(b) plans remained non-ERISA, and can help advisers diversify their business. The regulations are increasing nonprofit interest in adviser help, making business opportunities more available, agrees Zhivago Velasco, Product Development Director, Nonprofit Market, MassMutual Retirement Services Division.
Vince Rainforth, VP Tax Exempt Market at Principal Financial Group, which has 5,000 plans in the not-for-profit space, notes that a significant number of assets have built up in 403(b) plans in the past 50 to 60 years, predicting that the regulations will lead to more vendor changes for 403(b) plans, creating more business for skilled advisers who can help.
In addition, Whitney notes, as there are fewer advisers competing in this space, the nonprofit market tends to be less competitive than the 401(k) market, so an adviser can differentiate himself in the market more easily. Mixed Bag
If advisers decide to expand their practices into the nonprofit 403(b) space, they should know they are taking on a mixed bag of plan types. Whitney explains that there are basically two markets within the nonprofit 403(b) space: those that are governed by the Employee Retirement Income Security Act (ERISA) and those that are not. Within the non-ERISA market, there are multiple funding scenarios: A 403(b)(1) consists of individual annuity products that can have high expenses and back-end surrender charges; a 403(b)(7) is a mutual fund held by a custodian; or the plan could have multiple vendors and investment options. Unlike 401(k) plans, 403(b)s traditionally have not offered a canned investment menu and the participant himself has chosen vendors, meaning there can be multiple funding scenarios in one plan. He says often there is also a companion plan such as a 401(a), where employers make matching contributions to keep the 403(b) plan non-ERISA-governed, because the 403(b) was traditionally only for salary deferrals.
Velasco adds that, in the non-ERISA space, sponsor involvement traditionally has been much like in the K-12 space, where participants generally selected vendors and initiated transactions on their own (see “Reform School,” PLANADVISER, May-June 2009). Also, participation in the plans was low, around 40% to 50%.
However, Cumming notes that many nonprofits only had a 403(b), so, wanting to do the best by their participants, they added an employer match contribution and became ERISA plans. Those that already had a plan document in place, moved to a single vendor, and have plan committees in place to help fulfill their fiduciary duties.
New Focus
According to Thibault, each nonprofit has a unique culture. It may be environmentally conscious, or focused on community education, or devoted to a particular religion. As the plan members generally are devoted to their cause, there may not be a lot of awareness of investing or saving for retirement or types of retirement savings products. In addition, he says, they often do not have the HR capabilities to set up and maintain a plan.
However, there will have to be a greater focus now on how nonprofits are providing the retirement plan benefit to employees and increasing plan participation because of the regulations, according to Velasco. Whitney adds that, in order to stay in accordance with the new laws, sponsors now will have the administrative burden of coordinating loans and hardships among multiple vendors. Both Velasco and Whitney say they anticipate an increasing shift to a single vendor for plan administration of those non-ERISA plans that do not already work with a single vendor.
For those making the change, Thibault says the biggest challenge to plans with multiple vendors will be getting information-sharing agreements in place and consolidating to one plan document from multiple contracts.
Rainforth feels the Department of Labor (DoL) will have a larger influence than it has in the past on this marketplace, and the new reporting and audit requirements will drive sponsors to ERISA. Prior to 2009, 403(b) plans were not required to put financials on their Form 5500, but now they do, and those with 100 eligible participants also now have to do a limited-scope accounting audit.
Old annuity contracts were designed at the participant level, not the employer level, so it will be a significant challenge to get financial information and provide accurate data to the DoL in timely fashion, Rainforth contends. While K-12, public higher-education sponsors, and church organizations are not changed by these new reporting rules and are not required to complete Form 5500 or audits, “nonprofits now are truly going to be operating like corporate (k) plans,” he says.
Many providers are increasing the amount of help they offer to their 403(b) nonprofit clients. Principal, for example, is helping its 403(b) plan sponsors get a practice run by sending expanded Form 5500 packets early, along with life count and audit packages, to make the transition to the new reporting requirements easier. The company also devotes a section of its Web site to these plan types and offers a compliance guide for nonprofit 403(b) plan sponsors.
Helping Out
Much as is the case in the corporate 401(k) arena, the biggest role for
advisers in the new 403(b) environment will be helping with plan
design, plan benefit review, and analysis and benchmarking, suggests
Thibault. Because nonprofit sponsors want to focus on their
foundations’ missions, advisers’ expertise will be called in to help
with the search for new vendors or a single vendor, according to
Velasco.
Advisers also should help educate plan sponsors on all aspects of the
plan and educate participants on plan changes and investments. Cumming
notes that, as sponsors take a more active role in their plans,
advisers likely will have to help sponsors develop an investment policy
statement (IPS) and help monitor investments, especially necessary for
those plans governed by ERISA.
Whitney adds that advisers should help with enrollments and one-on-one
participant education, as well as give sponsors ongoing fiduciary
guidance. Further, for those advisers, or plan sponsors, interested in
a more holistic approach, advisers also can show sponsors and
participants tools and resources available for retirement planning,
Thibault adds.
Whitney says advisers should know that nonprofit sponsors value
high-touch service for participants to help them save. Advisers need to
understand that, at the end of the day, nonprofit 403(b) plan
participants usually are lower paid, and sponsors want to be able to
create the best benefit they can for employees. Velasco adds that these
organizations are mission-based, so financial matters may not be on the
top of their mind. He suggests balancing participant education by
telling them why they need to take time to consider financial matters.
Rainforth contends that, once 403(b) sponsors establish a process for
maintaining their plans, they will realize the streamlining (going to a
single vendor and running like an ERISA plan) makes things a lot easier
administratively.
Advisers definitely must have patience because the decisionmaking
process in the nonprofit space takes longer than in corporate plans,
usually due to a hierarchy in the institution, larger boards, and more
committees in the approval process, Thibault says. Advisers also must
have a willingness to do a lot of educational meetings and one-on-one
sessions, particularly when implementing a new plan or plan changes.
Advisers do not need to push products, according to Thibault, but must
be aware of providers in the space because the choice is more limited
than in the 401(k) space. He adds that advisers should educate sponsors
on the pros and cons of different solutions and fees.
The relationships with providers can be a boon for advisers looking to
move into advising these types of plans. For example, Rainforth says
Principal already has tools and value-added services in place that
advisers can use, instead of creating their own materials. Principal
provides thought capital white papers, a buyer’s guide, adviser
training, and a process for plan sponsors looking to move from
multi-vendor to single, as well as a vendor diagnostic tool comparing
current operations to change.
Advisers wanting to get into the nonprofit 403(b) space should start
with relationships. The tax-exempt community is close-knit and
relationship-oriented, says Rainforth. He suggests advisers identify
nonprofits in their community and work with them. “Start with a
relationship you already have and expand,” he advises.
Advisers should be aware of the compensation model in this market. It
can be a combination of 12b-1 commissions, fee-based, or reimbursement
from an ERISA account, Thibault says. He warns that many nonprofits do
not have the budget for consulting fees, so they prefer to use an ERISA
account.
Legislative changes are all good things, according to Thibault. There
should be much more responsibility and awareness of high fees that have
been going on for years. “It is our job to educate plan sponsors and
participants of all the positives,” he says.
“Although the new regulations were effective 1/1, market opportunity is going to exist for the next 24 to 36 months for advisers to help nonprofits get into a more modern era,” according to Whitney. “It is a great time to help sponsors understand their responsibilities and get to a better place.”