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Health care, higher ed nab two-thirds of 403(b) market

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The health care and higher education 403(b) markets now represent two-thirds of the total 403(b) market, according to a new study.

LIMRA discloses this finding in a research report, “Exploring 403(b) Plan Practices and Trends: Healthcare and Higher Education.” The study examines the two largest ERISA 403(b) market segments, health care and higher education, to understand the similarities and differences between the segments and how they compare with 401(k) plans.

The report shows that the health care and higher education 403(b) markets now represent $485 billion, or 67 percent of the total 403(b) market. The larger segment of the two, higher education, accounts for $320 billion in assets, or 44 percent market-share. Health care’s share totals $165 billion, or 23 percent.

“As plans in these segments become more similar to their 401(k) counterparts, they become an attractive market beyond the traditional not-for-profit retirement plan providers,” says Alison Salka, corporate vice president and director of LIMRA Retirement Research. “But our research reveals that each 403(b) segment has different characteristics that influence the services they value and need.

“Companies looking to enter this market need to understand the trends, needs and perspectives of these segments as they look to win a share of this market,” she adds. The study observes differences among the two 403(b) segments. For example, higher education plans have higher average participation rates (82 percent versus 65 percent in health care) and are more likely to offer a match (82 percent versus 72 percent). In addition, higher education plans are more likely to use multiple providers (17 percent versus 5 percent for health care).

Health care plans are more likely to offer a defined benefit (DB) plan than their counterparts in higher education. Both market segments are equally likely to offer automatic enrollment, but health care plans are more likely to use automatic deferral escalation (26 percent versus 14 percent for higher education), the report states.

Half of health care firms and one-third of education firms use an advisor or consultant, the report adds. Plans that work with advisors are more likely to believe they have met plan challenges, such as fiduciary responsibility, managing fees and expenses, and understanding changing regulation and legislation.

The study observed a distinction between the objectives of 403(b) plan sponsors compared with 401(k) plan sponsors. In the survey, 403(b) plan sponsors were more likely to say the primary objective of their plan is to help employees save enough to retire (86 percent). By contrast, about half of 401(k) plan sponsors reported that the primary objective of their plan is to offer a competitive benefit to attract and retain talent.

“We learned that 403(b) plan sponsors are likely to exhibit more paternalistic attitudes than sponsors of 401(k) plans,” says Salka. “Companies will be more successful communicating with potential plan sponsors if they recognize their primary purpose for offering a defined contribution plan.”

Representing the balance of the 403(b) market is the K-12 sector, which accounts for $125 billion, or 17 percent of the total; and a mix of other organizations, totaling $115 billion, or 16 percent share of the market.