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Big Opportunity in Small 403(b) Plans

By Gil Weinreich

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A new survey of 403(b) plan trends highlights opportunity for financial advisors looking to expand or break into the smaller nonprofit retirement plan market. That is one of the key findings outlined by Aaron Friedman, national nonprofit practice leader for the Principal Financial Group, which sponsored the Plan Sponsor Council of America survey.

Friedman, who spoke with AdvisorOne in a telephone interview, cited as one example the percentage of organizations with a committee that reviews fund performance. In the case of large plans (with 1,000 or more participants), 89% had investment committees compared with just 20% of organizations with 49 or fewer participants. “There’s work to be done here,” said Friedman, who added that it is in the smaller plans that have not refined their investment lineups or matched the level of participant education where advisors can add the most value.

Friedman pointed to a number of areas where the PSCA survey, released Wednesday, highlights a discrepancy between large and small plans. Nearly two-thirds of large plans changed their investment lineup in the past year. “That’s pretty close to [the level] in 401(k) plans, which makes sense because in general there is a due diligence process in place and that’s how these plans are supposed to run,” he said. But only 15% of small plans saw investment lineup changes within the last year.

More than three times as many large firms as small hired an investment consultant in the last year, and nearly twice as many increased participant education, the survey shows.

The best way to get into the market, Friedman said, is through networking. “Within one’s community, house of worship, Chamber of Commerce, that’s where [advisors] are going to find people involved in charity–by simply talking to people involved in charitable organizations.”

Companies with existing plans are ripe prospects: “If it’s an archaic structure, if it’s not working to attract and retain employees; if it has the old non-ERISA approach. It comes down to customer service. An advisor who can offer a holistic approach has a leg up from a service perspective,” said Friedman, whose company provides education, support and service to advisors in this market.

Overall, the PSCA survey shows that 403(b) plans are progressing in key areas like automatic enrollment, education, participation rates and matching contributions despite economic weakness. For example, nearly 40% of organizations that had suspended or reduced their matching contributions have restored it to previous levels in the past year, and 16% of nonprofits have increased their contributions.

“Given what tends to make the news and all the concern about the economy; it’s good to see that when it comes to retirement savings, especially with nonprofit and educational institutions, that they’re on course,” Friedman said. “Nobody is looking at the economy as a hindrance toward long-term planning.”

In the depth of the recent economic crisis, in 2008, Friedman says there was some cutting back in employer matching contributions and employee participation rates. “It wasn’t extreme, but it was noticeable.” In 2009 and even 2010, there were still more people decreasing their deferral rates than increasing them, though for the most part, most people made no changes. In 2011, however, while the most significant percentage did not change their deferral rates, significantly more increased rather than decreased them.

What these retirement plan statistics show is that the 403(b) market is steady. “2008 was a rather extreme environment and we did not see [severe changes] for non-profit organizations. They’re needed in all environments, and they need to attract or retain employees” through these plans, Friedman said.