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Retirement Planning > Saving for Retirement

403(b) Plans Are Ripe With Opportunity for Advisors

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The public-sector pension crisis could help boost the profile of the only other retirement savings vehicle that governments, schools and public hospitals can rely on to help employees save for retirement: the 403(b) defined contribution plan.

Most in the industry, however, will tell you it’s a challenge to serve the 403(b) market, particularly that slice of plans that are not subject to the Employee Retirement Income Security Act. On the flip side, they’ll also tell you that the market is ripe with potential.

Participation rates in 401(k) plans hover around 70%, while participation rates for 403(b) plans is about 30%, said Chris DeGrassi, executive director of the National Tax Sheltered Accounts Association, a professional association that focuses on the non-ERISA market and small governmental and not-for-profit retirement plans.

“We’ve certainly seen, with the pressure placed on public employees from the pension side, a need to increase both participation rates and contribution rates [in 403(b) plans]. The way we see it, the demand for investment professionals to engage in and assist in this market has never been higher,” he said.

Total 403(b) assets reached a record $750 billion in 2010. Cerulli Associates of Boston predicted that aggregate 403(b) assets would grow steadily to $1.1 trillion by 2016.

The biggest problem with the 403(b) market, insiders say, is that it still isn’t the 401(k) market.

Specifically, the 403(b) market is, by its nature, focused on individuals because it is a voluntary, supplemental savings program, DeGrassi said. 

Plan sponsors will generally give employees access to numerous 403(b) retirement plan providers, but they don’t offer automatic enrollment, auto-escalation or employer matches. Instead, they just manage an employee’s pre-tax contributions into their selected 403(b) retirement plan.

Because it is up to employees to choose their own investments and investment provider and because their employers offer no incentive for them to set additional money aside, advisors pursuing the 403(b) market have to be comfortable working “belly-to-belly” with plan participants, he said. In the 401(k) model, of course, advisors give advice at the plan level rather than on a personal level.

“The challenge for an advisor is really finding ways to work with the employer to get access to participants to provide the education and professional services (they need) to get them to participate,” DeGrassi said.

That’s not only challenge, though. Additionally, advisors in this niche need to determine whether a potential client is covered by ERISA.

According to the Plan Sponsor Council of America’s 2013 403(b) Plan Survey, more than 76.3% of respondent plans were ERISA plans; 16.4% were non-ERISA and 7.3% were unsure of their plan’s ERISA status.

“There has been an attempt to ‘levelize’ the services and the way plans are run between the 401(k) and 403(b) marketplace, but I’m not so sure that levelization has been that effective,” said Lee Topley, managing director of the retirement plan consulting group at Unified Trust Co.

In most scenarios, school systems and hospitals have multiple providers offering 403(b) plans. Participants pick the provider they want their deferrals to go through. At that point, the plan sponsor wipes its hands of the matter. The relationship is between the service provider and the participant, Topley said.

The Department of Labor would like to see 403(b) plan sponsors held more accountable to their retirement plans.

Non-ERISA plans do not have to file a Form 5500 with the Department of Labor. They are not subject to testing, fiduciary or fee disclosure rules, said Sarah Simoneaux, president of Simoneaux & Stroud Consulting Services in Mandeville, La., a retirement services industry consultant who works with both for-profit and non-profit organizations.

Bruce Ashton, a partner in Drinker Biddle’s Employee Benefits & Executive Compensation Practice Group, believes advisors should treat all plans as if they are ERISA plans because it is a “good idea anyway from a good practice standpoint.”

That would mean providing plan sponsors with 408(b)2 fee disclosure notices, assisting them with getting providers and helping them with 404(a)5 participant disclosures.

“Even if those disclosures aren’t required, in some respects it may be easier for an advisor to help a client do that,” Ashton said.

Simoneaux recommends advisors who want to work within the 403(b) space partner with a third-party administrator that knows the market well.

““Fees are higher and there is a lot more work involved with multiple providers and giving financial advice,” she said. “(But) if this is what you really want to do, if this is the market you want to be in and you want to tackle the documentation on the non-ERISA side, work with a TPA record-keeper.”

As any seasoned advisor knows, if the employer is involved in the 403(b) plan, he or should could be dealing with an ERISA plan. If the plan sponsor can administer loans, certify hardship withdrawals, monitor investments or designates a single provider, there’s no question ERISA applies. Colleges fall into this category a lot, Simoneaux said.

Other typical ERISA 403(b) plans include hospitals, nonprofit entities like museums and foundations and private higher-education institutions.

Typical non-ERISA 403(b) plans include K-12 schools, public higher education, governmental 457 plans and churches.

Simoneaux believes that colleges and universities are a good target for advisors wanting to enter the 403(b) marketplace because many haven’t shopped their plans in more than a decade.

“Offer to do an ERISA audit with them,” she suggested.

Tim Maher, senior vice president and national sales manager for Natixis Global Asset Management, works closely with ERISA 403(b) plans, which he said are beginning to look, smell and act like corporate 401(k) plans.

Advisors in both spaces work with plan sponsors to provide education to participants, put plans in place and structure investment committees. They also are getting more creative in the types of investments available to both plans. Alternatives are becoming more popular, so financial advisors are helping plan sponsors put together more custom portfolios.

The bottom line? As many public-sector and nonprofit organizations look to move away from defined benefit pension plans, “there could be significant opportunities in the 403(b) space for advisors because of the sizable pool of assets – if they are willing to put the effort and time commitment to get those rollover dollars into the plan,” Unified Trust’s Topley said.

Also read:

Investment in 403(b) plans jumped in 2012

LIMRA study explores higher education, health care 403(b) plans


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