New Season for 403(b)s

In accordance with regulations, sponsors focus on improving plans

In the years following the passage of the Internal Revenue Service (IRS) 403(b) regulations, plan sponsors focused on understanding and complying with the new rules. Now, five years later, sponsors have shifted gears to concentrate on perfecting their plans and creating outcomes for participants.

The biggest trend in the 403(b) retirement plan market segment is plan sponsors’ shift to a focus on the goals of their retirement plan—to move participants to a position where they are able to retire with dignity, says David Ray, vice president of Strategic Sales at TIAA-CREF.

According to Carl Steinhilber, nonprofit practice leader at MassMutual Retirement Services, due to this focus on participant outcomes, MassMutual is noticing increased use and interest in target-date funds and auto-enrollment. In addition, the firm is seeing an increase in benchmarking exercises for fiduciary investment and participant education.

Steinhilber says plan sponsors at nonprofits always have been paternalistic, but the 403(b) regulations increased attention to the health of retirement plans. A key point is ensuring employees are educated about what is required to be retirement ready and that they are investing appropriately. Therefore, plan sponsors, vendors and consultants will all need to shift to that focus and confirm that investment lineups and employee education result in moving participants to retirement.

Increase in RFPs 

The shift in focus has resulted in an increase in request-for-proposal (RFP) activity—a second wave following the first wave after regulation changes, according to Steinhilber. Sponsors are beginning to realize it is difficult to manage the plans by themselves, and those who did make provider changes during the first wave of plan changes are ­re-evaluating their decisions—whether evaluating new options for investments, further provider consolidation or new participant education options.

One issue driving the increase in RFP activity is consolidation among plans, says Brodie Wood, national practice leader for Diversified’s not-for-profit market. Especially among health care employers, there have been mergers resulting from the health care reform legislation, creating redundancies in plans.

Steinhilber adds that there is also the continuing challenge for plans remaining multivendor; sponsors must seek help with the coordination of information across vendors. The best solution, he believes, is to move to a single provider, but if this is not possible, third-party administration firms can help coordinate information.

In addition, according to Jon Prescott, president at CPI Qualified Plan Consultants, smaller K-12 schools are looking for a single 403(b) administration service, because unions have resisted consolidating vendors. However, a few sponsors did see unions move to a single provider, also requiring RFPs.

Furthermore, because K-12 schools are government agencies, they are under pressure to monitor budgets and dollars; therefore, they are rebidding contracts to make sure they receive the most reasonable costs for services on behalf of taxpayers, Prescott says. In the private university and colleges market, plan sponsors are also looking to a single provider because they want more control over plan administration.

403(b) plan sponsors are also evaluating open architecture for investment plan lineups, moving away from offering variable annuities to offering mutual funds, notes Wood. He adds that in the 403(b) retirement plan market, there is much money locked up in individual annuity contracts, and it would be easier for sponsors if the money was moved to other investments. Plan sponsors can turn to their vendors for assistance; for example, Diversified offers tools to help participants decide if they want to move money out of these contracts, and counselors will help them with the paperwork.

In RFPs, 403(b) plan sponsors should ask how much of the system for providing the oversight needed for plans is automated and how much is manual. This will show a firm’s level of financial commitment to 403(b) solutions. Sponsors should also ask whether a provider has on-the-ground staff for education, Steinhilber adds.

Other trends leading to an increase in RFP activity, according to Wood, include 403(b) plan sponsors that are unsure of their Employee Retirement Income Security Act (ERISA) status. Some sponsors are choosing to abandon non-ERISA status for ERISA status.

Fee Disclosure 

Fee disclosure regulations have resulted in unprecedented attention to the fiduciary process and fees among 403(b) plans, says Ray. The release of this information will motivate actions such as fee benchmarking, and plan sponsors will need the help of an adviser. It will lead to increased RFPs and search activity, and potentially more vendor consolidation, he says.

Steinhilber notes that, in particular in the nonprofit retirement plan market segment, fee disclosure regulations are pushing them to consider how to communicate fees to employees, especially with multiple vendors. But it is also an opportunity for plan sponsors to get a handle on what providers are offering and the costs associated with such offerings. According to Steinhilber, sponsors have not been paying attention to fees, so there may be surprises.

For plan sponsors and participants trying to understand the disclosures they are given, qualified retirement plan advisers can be a big source of help. In addition, advisers can assist sponsors with the delivery and coordination of fee disclosures to ­participants.

Team Effort 

As is the case with 401(k) plans, running a 403(b) plan is increasingly becoming a team effort. Wood says 403(b) plan sponsors need a combination of help from providers, consultants and advisers.

When searching for one of these partner organizations, Steinhilber says sponsors should look for a provider that can meet participants’ needs, keeping in mind that some will want help on-site. Providers should also have plan metric capabilities, to look at the data and recognize target audiences, and then create a participant education plan specific to the needs of the audience in the education meeting.

Prescott adds that plan sponsors must look for provider firms that have a history in plan administration and regulation compliance. 403(b) plan sponsors need to observe the financial strength of providers and their commitment to the business and to providing retirement income, Ray adds.

According to Ray, when hiring an adviser or consultant, plan sponsors should check that the adviser has legal and technical capabilities to meet the needs of the plans. The adviser should understand the nuances of the 403(b) space, such as individual contracts and how assets move. It is important that an adviser is capable of telling sponsors what they have in their plans, what the rules say, how much control they have and how to enhance the plans.

“The main thing is going to be the participant outcomes,” Ray says. “At the end of the day, people need, and want, to retire. The focus of the business is moving toward participant outcomes—not only saving enough but being able to pay for expenses in retirement. There is also an emotional factor; outcomes have to meet with the expectations of participants, and providers need to understand that.”

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