403(b) Summit: Overcoming Hurdles in the K-12 Market

Consolidating to a single vendor is one large feat many schools in this market segment are facing.

William Beale, director at Henderson Brothers Retirement Plan Services, works as a consultant in this market in Pennsylvania, and has faced conflicts when attempting to move plans to a single vendor. He said they have run into union politics that have thwarted the process.

That is no surprise, as unions in states all over the country are trying to stop efforts to limit their choice of vendors. In states such as Virginia, New York, and Maryland, teachers’ unions have spoken up (see Newport News School Employees Howl against 403(b) Vendor Limits , Utica Teachers’ Union Opposes Exclusive Vendor for 403(b) , and Baltimore School Officials Give Thumbs Down on 403(b) Vendor Consolidation ). Beale finds it ironic, because he said the union is supposed to help, rather than block efforts to help because they do not understand.

Forrest Jack Lance, general counsel for the Rockdale County (Georgia) School district, said that while unions aren’t “bad,” teachers and unions do need help with their retirement plans. In fact, schools in this market might face particular challenges with compliance. For instance, it might be difficult to find lawyers and financial advisers that understand the market, especially on the low-budget of many school districts.

From the consultant side, Beale said he sees some “terrifying” things happening. He notes that when he has stepped into a plan, he has found local attorneys do not have a lot of background working with 403(b) plans.

Lance said sponsors need to go to their lawyers and ask if they are competent. He mentioned that one contract with a vendor was 81 pages single-spaced, and he admitted he didn’t have the competency to flush out all of the fee disclosure issues within it. “These things have some real landmines,” he said. Additionally, the plan needs to pay attention to individual state laws about fiduciary responsibility, and that requires a competent attorney, he added. Lance said he himself felt nervous about being in charge of his district’s plan, and finally convinced his board to bring in outside counsel.

John Kevin, investment officer for the Montgomery County (Maryland) Public Schools, said he spent a lot of time getting vendors to the table to comply with the IRS written plan requirement. Leading up to the January 1 deadline (which was pushed back), Kevin said he was ready to go, but the vendors weren’t there. “It was a lot of herding cats,” he said. Kevin said he learned from experience and offers this advice to sponsors: Do not assume that vendors and administrators are on top of everything.

Beale noted that the amount of education needed in this space is "over the top." Teachers do not understand 403(b) plans, he said.

One of the things to keep in perspective, Kevin said, is that for K-12 employees, the 403(b) is a supplemental benefit most of the time. "It's new in awareness," he said. It is not like the 401(k) market where defined benefit plans are not as prevalent anymore. "We have to be patient as this marketplace evolves," he said.

From an education standpoint, it is important to educate about the 403(b), "but it can't dominate the conversation about retirement," Kevin said. Education is still also in the evolving stages and faces hurdles, such as not having most employees in the same room very often, he noted.

Other ways K-12 403(b) plans will evolve is to have more negotiating power with vendors the way 401(k) plans do, Beale said. As more 403(b) plans move to a single-vendor platform, we will see more of this. "The fewer vendors you have, and as the average account balance goes up, the better deals you can get," he contended.

- Ellie Behling