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Advisors Wanted: 403(b) Plans Need ‘Modernizing’

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An annual benchmarking survey of nonprofit sector retirement plans shows broad improvement, but the survey’s sponsor says financial advisors are needed to close the still yawning gap between 403(b) plans and their corporate cousins, 401(k)s.

Aaron Friedman, national nonprofit practice leader of the Principal Financial Group, which sponsored the Plan Sponsor Council of America survey released Tuesday, told AdvisorOne that in areas like investment options, investment policy statements and participant education, advisors have a role in “modernizing” 403(b) plans.

A good example would be in the area of default investment options, where the survey shows that 72.5% of 403(b) plan sponsors are now using target-date funds, up from 69.1% in 2010. But Friedman said 22% of plan sponsors are still using money-market funds as default options, a practice mostly abandoned by 401(k) plans.

“If you take a look at what are prudent plan choices, if you look at what the Department of Labor has said, a money-market fund is not a qualified default option,” he said, noting their short time horizon and near-zero yields are inappropriate for long-term retirement investing. A professional investing perspective is “the expertise that the advisor can bring to the table,” Friedman added.

Other areas where an advisor’s touch can move these plans along include automatic enrollment, which is increasing but at a slow rate and “retirement readiness”—getting plan participants to save at higher levels, say 10 to 15%, Friedman said. “Survey trends show they are improving markedly, but they are still way behind 401(k)s” in these areas, he said.

Some of the biggest strides for 403(b) plans in the new survey include a decline in the number of plan sponsors who did not know their ERISA status (6.8%, down from 10% in 2010); 20% fewer sponsors were uncertain as to whether they had an investment policy statement; an increase in the percentage of plans allowing Roth contributions to 21.7%, up from 16.9% in 2010 and as little as 10.9 percent in 2007.

There has also been an impressive surge in the use of seminars and workshops, now used by 53% of 403(b) plans, from 41.8% in 2010.

“Advisors deserve a pat on the back for some of the improvements we’ve seen in the past couple of years,” Friedman said, adding that all these areas point to the value advisors can bring to 403(b) plans.

The survey reveals ample room for advisor input. Just 43.5% of tax-exempt organizations retain an independent investment advisor to assist with fiduciary responsibility, and smaller plans are especially bereft of advisor input. Hospitals have the highest level of advisor penetration, with 73.2% served by an advisor, and non-hospital health care enjoyed the second highest level of advisor input (49.2%).

But education industry nonprofits are poorly served, with just 30% of these institutions (36% for higher education institutions) enjoying advisor support. Foundations are also ill-served (31.6%) by advisors.

Friedman says the low level of requests for proposal (RFPs) is an indication of the market potential advisors have in 403(b) plans. “More than 20% of organizations have not done an RFP in more than five years. Another 32% that have never done an RFP. If there are more than 50% [of nonprofit plan sponsors] that haven’t looked at this, there’s an opportunity for advisors,” he said.

The Principal Financial executive said winning this business is a matter of having a simple conversation. “It’s just talking to folks and finding out what they’ve been doing; how they’ve been handling the changes due to regulations; how well do they think the plan is serving their participants and when was the last time they looked at it.”

Friedman cautioned advisors not to assume a high level of sophistication on the part of 403(b) plan sponsors.

“There are certain things that a lot of advisors take for granted in the 401(k) world that are not necessarily understood in this 403(b) world,” he said, noting the number of plan sponsors who did not even know their ERISA status. “Here’s an opportunity to add value and establish those relationships,” he said.


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