What You Need to Know About 403(b)s

Not just a 401(k) for nonprofits, 403(b) plans are a distinct world with unique challenges and a lot of complexity, advisers say.

These retirement savings plans for the employees of nonprofits are a different ballgame, says James Sampson, managing principal of Cornerstone Retirement Advisors. “The language is different, and the way you talk about employees is different,” Sampson tells PLANADVISER.

Since many nonprofits may have a harder time competing in wages, Sampson says, they try to make their benefits especially competitive. “They’ll often have more robust health insurance, more robust matching contributions,” he says. Sampson says his firm began expanding into nonprofits over the last few years, picking up some 403(b) plans and a couple of 401(a) plans.

Advisers who are used to boardroom committee meetings and discussing return-on-investment issues may find the culture of a nonprofit forces a different conversation with the plan sponsor client. The organizations themselves can be quite varied, says Ellen Lander, principal of Renaissance Benefit Advisors. 

“Health care organizations tend to act very much like corporations,” she tells PLANADVISER, with similar governance and an executive suite that resembles that found in corporations. Lander says about half her business is in nonprofits, built more from word-of-mouth referrals than from a conscious decision to go into it.

The trusts and foundations do wonderful work, Lander says, but they think different and they act different. “It makes sense,” she says, “because their core business is the nonprofit’s mission. An organization that provides health care for women or addresses birth defects is all about benevolence. Many are not structured the same way as a corporation.”

The committees tend to be extremely different, Lander notes: much larger, and much more inclusive. “They want the opinions of everyone throughout the organization, which makes it difficult to make decisions,” she says. It’s not uncommon to find rank-and-file employees sitting on the plan committee who lack some of the basics of fiduciary understanding and good plan governance. “With the culture of a nonprofit, it makes sense that the committees are larger. I’m fine with it, but it’s sometimes difficult to get through meetings.”

A Better Benefit

Nonprofits are of course interested in revenue and profit, Sampson says, but they tend to have a dedicated attitude toward creating retirement readiness for their employees, which often results in higher adoption of progressive plan features, such as auto-enrollment. It can be like pulling teeth in a 401(k), he says, but in nonprofits, the minute they hear about the feature they want to do it. “They want their people to have a better benefit, because that is how they hold onto them.”

One reason nonprofits may be more receptive to conversations around retirement readiness and plan governance is the Form 5500, Sampson says. The audit requirements 403(b)s have been subject to since the Pension Protection Act (PPA) of 2006 have disclosed massive procedural issues impacting 403(b)s, he says. Examples of problems include everything from recordkeepers recording plan loans as if they are paid through payroll deductions, to recordkeepers treating the plan like a collection of individual 403(b) annuities instead of a single plan.

Legacy annuities that were implemented in older nonprofits are a key difference in many 403(b)s, Lander says. Before 2006, when the 403(b) plans were brought into the Employee Retirement Income Security Act (ERISA) regulations, many nonprofits purchased individual annuity contracts.

“The old annuity contracts are expensive, but you can’t get rid of them,” Lander says. “The problem is, they’re not under the control of the organization, but of the individual employees. If we look at them and say the performance is bad, and the fees are sky high, what can we do about it? Nothing.”

The adviser cannot force employees out of an annuity, Lander explains, which can create some tension in trying to fulfill the fiduciary duty to act in the participants’ best interests. In larger organizations that work with advisers, sometimes the ability to purchase annuities individually has been shut off, and employees are funneled into an institutional group annuity contract.

Another issue with legacy annuity contracts, according to Lander, is plan pricing. Depending on the situation, you may not have enough money to get the best possible price for that plan if you want to take it to market, she says.

Plan Pricing

Perhaps the plan has $20 million in assets, but $15 million is in annuities. “Even though it’s a $20 million plan, it’s going to be priced like a $5 million plan,” Lander explains. “The money is not liquid, because it’s in annuities—so I can’t draw a good price.”

The plans can create a lot of work because of their complexity, Lander says. The committee should look at performance in the older annuity contracts, she feels, so it’s not uncommon to get committees that want to see performance comparisons—but it always returns to the same issue of not being able to actually do anything.

Changing communication strategies for some participants could be an answer, since some are so poorly served by keeping their money in the old contracts, Lander says.

Sending plan notifications to participants can be more complex with a 403(b), Lander notes, since they must come from every single vendor. These plans generally require a plan adviser to be on top of more things. “You can’t just depend on vendor reports for notifications,” she says, “since not every provider is paying attention.” One of Lander’s plans had four vendors, with three of the vendors of old annuity contracts frozen but still holding plan assets. The number of vendors also drives up audit costs for the 403(b) plan sponsor.

But Lander feels the world of 403(b)s can be rewarding for advisers who would enjoy the challenge of streamlining the plan to make it run, in some respects, more like a 401(k) plan, and who have the same mindset as the plan sponsor client. “Just like they serve and help others, you have to serve and help that client,” she says.

 “You have to be ready for a new challenge,” Sampson says, when taking on 403(b) plans. “You need the right compliance team in place.”

“I like to help people who help others,” Lander says. “Let them help the people they help, and I’ll make sure they are covered, and that their employees have the best plan they can have.”