Administration

The Need for a Better K-12 403(b) Plan Design

Lack of awareness, pressure by vendors that want to maintain the status quo and limited provider choice are hindering K-12 403(b) plan sponsors from consolidating vendors and improving their plans.

By Rebecca Moore editors@plansponsor.com | July 22, 2015
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The traditional 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.

David Hatter, 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 tells PLANSPONSOR.

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.

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