State legislation is threatening to eliminate workers' retirement options, which would likely result in lower participation rates in 403(b) plans.

School districts should avoid reducing the number of investment providers to protect the levels of participation in 403(b) plans, according to a new report.

The American Society of Pension Professionals & Actuaries, Arlington, Va., published this finding in a white paper that evaluates the impact of participant choice in 403(b) plans. The report explores the extent to which workers prefer choice in their 403(b) plans and the impact of having choices.

The paper reveals a decrease in the participation rates for 403(b) plans when the number of investment providers is reduced. The paper also finds that school district employees benefit from the option to receive advice, both in terms of their preparation for retirement and participation levels.

“School districts [should] consider alternatives to reducing the number of investment providers in order to reduce costs,” the paper’s authors write. “These include using an independent third party administrator (TPA) to administer the plan and providing transparent disclosure of investment fees and other expenses to workers.”

Among the statistics cited by the white paper’s authors to support their conclusions:

—An analysis of employees in 55 school districts in Southern California shows that over 50% of workers stopped contributing to their 403(b) plans when their existing provider was no longer available.

—After a school district in Indiana County, Pa., reduced its investment providers to one from 19 between September 2008 and September 2010, nearly 40% of participants ceased participation in the district’s 403(b) plan.

— The number of contributing 403(b) plan participants in Colorado’s Jefferson County School District in Colorado dropped by approximately 54% from 2004, when multiple investment providers were available to 2009 when a single investment provider approach was used.