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.