Higher Standard
The regulations governing 403(b) plans are poised to reinvent the defined contribution plans offered by tax-exempt entities such as K-12 school systems, higher education institutions, and nonprofits. Each of the three distinct employer groups has certain unique characteristics, with varying demographics, needs, and expectations. For advisers, the expanding 403(b) market represents a significant business opportunity, but it would be a mistake to assume blithely that you need only redirect your 401(k) practice to the tax-exempt space.
The higher education institution market segment shares many similarities with the K-12 market segment (see “Reform School,” PLANADVISER, January-February 2009). For example, most plans in this space have had little sponsor oversight. Vendors traditionally worked one-on-one with participants, resulting in a multivendor environment. Some 403(b) plans had vendors numbering in the hundreds.
However, there are significant differences that make advising plans in the higher education space a different task than in the K-12 market segment.
Michael J. DiCenso, National Practice Leader at Gallagher Retirement Services, which has more than 450 403(b) clients nationwide across all market segments, points out that one significant distinction that some higher education institution plans, if they offer employer contributions, are governed by the Employee Retirement Income Security Act (ERISA). (Other conditions concern fiduciary involvement and decisionmaking, and public universities are never governed by ERISA, however.) Although this is a given in the 401(k) space, many sponsors in the 403(b) sector have not had to conform to the standards set forth by ERISA, and many do not want to. In fact, some plan sponsors established a 401(a) plan for employer contributions to keep their 403(b) from being ERISA-governed.
DiCenso says not wanting to fall under ERISA is one reason for a lack of oversight by sponsors offering 403(b)s without an employer contribution. Sponsors did not want to make decisions on behalf of the plan for fear they would become fiduciaries. The bottom line is that advisers entering the higher education institution market could be working with both ERISA and non-ERISA plans, or choose to work with one or the other.
David Ray, Vice President and Not-for-Profit Practice Leader at Diversified Investment Advisers, says that because most private higher education institutions offer a match, most are subject to ERISA. “That does not guarantee, however, that they are employing fiduciary best practices. In fact, many are not; therefore, this represents a great opportunity for advisers—that is, to install a fiduciary process,” he says.
Another key difference between higher ed plans and those in the K-12 market segment is union presence. Although DiCenso points out that there may be a bureaucracy in the higher ed space with deans and department chairs, those individuals generally do not have the power to influence change the way unions do in the K-12 market. Therefore, he explains, interaction with deans and others will be more about just informing them of what they need to know, as there will be committees in place to make decisions.
For various reasons, whether to comply with state regulations about fiduciary roles or public university plans, to better comply with ERISA, or in anticipation of the new regulations, many higher ed institution 403(b)s have gotten a jump on making changes that would have had to be made under new regulations.
Jeff Seymour, Managing Partner with The (k)larity Group, an NRP member firm, which has more than a dozen regular 403(b) clients and a handful for which it does project work, says all of his clients had been looking to revamp their plans prior to the new regulations being established because they had wanted to make administration easier and clean up investment options. They already have established plan documents, pared down the number of vendors, and established investment guidelines, for example.
New Establishment
For those plan sponsors who may be trying to come into compliance with the regulations now, the new rules mean establishing a written plan document, or restating their plan document to comply with universal availability rules, for example, if they were excluding visiting professors, Ray points out. Prior to the new rules, a 403(b) plan could exclude employees who make a one-time election to participate in a governmental plan instead of the 403(b); employees covered by a collective bargaining agreement; visiting professors for up to one year; and employees associated with a religious order who have taken a vow of poverty. Under the new regs, however, plans no longer can exclude these employees from eligibility to participate, and all employees working at least 20 hours a week must be allowed to make deferrals of at least $200. DiCenso says the written plan document requirement has presented significant issues for plan sponsors who have not had one in the past, and sponsors are wondering if they should craft the document themselves or get a vendor or consultant to do it.
The new regulations also are making sponsors question their fiduciary status. They are looking at committees and how they make decisions now that the regulations are forcing them to monitor and control participant transactions and have more oversight over the actions of everyone involved with the programs, according to DiCenso.
In addition, those sponsors who made employer contributions into 401(a) plans and felt that made their employee-deferral-only 403(b)s exempt from ERISA are now questioning that logic, DiCenso says. David Levine and David Powell of the Groom Law Group say the Department of Labor has issued no authority on the subject. “However, recently, representatives of the Department of Labor have expressed concern in speeches whether this approach may affect the ERISA status of the 403(b) plan. Employers should exercise some caution,” they advise, in an article written for PLANSPONSOR.com.
Plans that are governed by ERISA now are subject to Form 5500 and audit requirements. These plans now have to complete the full Form 5500 annual reporting—including the revised Schedule C for plan year 2009—and plans with more than 100 participants also now are subject to an annual independent plan audit. According to Ray, plan sponsors are questioning how to get information for the Form 5500 from multiple vendors and are questioning how to do the audit and how they are going to pay for it. As in the 401(k) space, the new rules are making sponsors more conscious of plan fees and whether these fees can be passed to participants.
Seymour says sponsors will be shocked when they realize what information auditors need for the financial accounting statement required for plans with more than 100 participants and his firm is preparing clients by suggesting they hire an audit firm. There is a big learning curve regarding being monitored by the Internal Revenue Service, he adds. Plan sponsors also may be surprised at all the plan details required to be reported for Form 5500 schedules for ERISA plans (see “Traps for the Unwary“).
Role Call
This is where an adviser can add value. Seymour says the role of an adviser to higher education institution 403(b) plans is to prepare them for audits, and educate them about the regulations and being monitored by the government. He notes that advisers will have to fall on the 401(k) standard (as there is no standard yet in the 403(b) market), but it is a standard that advisers can defend.
DiCenso says the role of an adviser is straight procedural and fiduciary consulting more than anything. He says advisers to this market will work with committees to help them make plan decisions.
Advisers should teach higher education institution plan sponsors fiduciary best practices, Ray says. Even if a 403(b) is not ERISA-governed, there are sometimes state dictates for fiduciary duties, so sponsors should have fiduciary processes in place. Ray says an adviser also adds value by helping higher education plan sponsors develop an investment policy statement (IPS) and perform the necessary ongoing due diligence. Another way advisers can help their sponsor clients is to know what providers can and cannot do, so the advisers can negotiate for universities with providers.
“Once you get in with a retirement plan committee, it is about keeping the relationship and doing the right things,” says Jim Racine, Associate Vice President, Defined Contribution Strategy at Lincoln Financial Group. Advisers must understand the need to service both the employer and participants, not just participants as in the past. “If there is no relationship with the people administering the plan, advisers will be out of the plan,” according to Racine.
Advisers also may provide participant education, something that Seymour says has traditionally been lacking in this space, either by putting someone on site or by managing the education process. Advisers should help sponsors develop multiple employee education presentations for different employee types, he adds. According to Racine, rank-and-file employees especially need someone to take the time to educate them. One of the struggles with getting employees interested in participating in their 403(b) plan is that most employees in this market also are covered by defined benefit plans. Therefore, it is somewhat of a challenge to convince employees they need to participate in their 403(b), according to Seymour.
Seymour says the diverse group of employees, from rocket scientists to landscape crew and maintenance, presents a challenge to advisers trying to educate employee populations.
Higher Calling
“With the right model, [the higher education institutions are] absolutely a high-revenue market,” Ray says. He says universities are more interested in solutions than negotiating fees, so, if an adviser can provide solutions and is credible, he or she can get a loyal client base in the higher education market.
DiCenso adds that the more sophisticated, more professorial types of personalities of higher education 403(b) participants provides an opportunity for individual relationships between advisers and these participants after they retire, if an adviser wants to pursue wealth management business.
Seymour says advisers should want to get into the higher education institution market because there is a definite need; the plan sponsors are scared and know they need guidance.
According to Racine, the biggest reward of serving this market is the reward of helping people who help others. “Those [advisers] who do have a passion are embracing this market segment and the change the most,” he says.
Illustration by James Yang