design of 403(b) plans as individual annuity contracts or custodial accounts
for participants resulted in many plans having an unwieldy number of vendors
associated with the plan.
This is especially
true in 403(b) plans sponsored by K-12 public school systems. Although these
plan sponsors may not have the same concerns about this plan design as do
sponsors subject to the Employee Retirement Income Security Act (ERISA) and
heightened responsibility dictated by the 2007 Internal Revenue Service (IRS)
regulations, having so many plan vendors can be an administrative headache, and
K-12 school systems are realizing it may not be best for participants.
There is a small
army forming of third-party administrators, plan advisers and K-12 403(b) plan
sponsors that want to show K-12 school systems a better way.
president of advisory firm Invest-N-U, in Alpharetta, Georgia, says he has been
traveling for the past several years telling K-12 403(b) plan sponsors they can
improve both participant and employer outcomes, but they have to want to do it.
Hatter points out that in the traditional, multiple annuity model, employees
with little or no interest in becoming investment experts are in charge. Each
individual employee must evaluate multiple service providers, scrutinize
investment managers, and benchmark fees and expenses. No doubt that without the
time, resources or interest in the subject, most employees are ill-equipped to
chart an efficient course to their desired destination: Retirement. “Because they are not subject to ERISA, we can’t say to plan sponsors [making these changes] is the law, but we can
say, ‘If you care about your employees and the
future of your district, you should consider this,’” he
Hatter says many
K-12 school systems are not aware that they can make substantial changes legally, and they have historically maintained a hands-off approach to their
plans. In addition, some have fears—sometimes from
scare tactics used by service providers interested in protecting the status quo,
according to Hatter—that they may make employees or unions
angry. That this widespread problem needed to be addressed came to Hatter after
working within the status quo with several school systems in Georgia. NEXT: Bentonville Public Schools finds a better way.