“The two plans could not be more different in terms of available vendors (I have one provider, she has 15 from which to choose), costs (low for mine, all over the map for his) and number of investments (about 20 for mine, about 40-50 with each of his available vendors, though some overlap). Why are the two 403(b) plans so different?”
Michael A. Webb, Vice President, Retirement Services, Cammack LaRhette Consulting, answers:
The answer lies in the fact that we are dealing with two separate and distinct marketplaces — health care and K-12 public schools — that evolved completely differently over the years, ironically from very similar starting points.
Many years ago, 403(b) plans for nearly all types of qualifying entities, with the possible exception of higher education institutions, were a voluntary benefit that supplemented a defined benefit pension plan. Like other voluntary benefits, employers generally had little, if any involvement in their 403(b) plans. The relationship was primarily between the participant and whatever 403(b) provider he/she selected, often resulting in a large number of vendors servicing each 403(b) plan.
However, for health care entities, the 403(b) has evolved into the primary retirement plan over the years, essentially replacing the defined benefit plan at many organizations This change resulted in increased oversight by health care entities of their 403(b) plans, primarily due to regulation (e.g., a federal law known as the Employee Retirement Income Security Act (ERISA) requires a certain degree of oversight if employer contributions are made to a 403(b) plan, which is often the case at present).
Thus, the relationship has evolved from one between the participant and the vendor to one between the employer and the vendor. To facilitate compliance with ERISA and for reasons of administrative efficiency, this has often meant consolidation from a multiple provider servicing model to a single provider servicing model , or to a third party administrator overseeing selected multiple vendors. The recent added complexity of additional regulation by the IRS beginning a few years ago has accelerated that trend.
However, public school districts are not subject to ERISA and, at any rate, still participate in defined benefit retirement plans for the most part. Thus, the dynamic of the primary relationship being between the vendor and employee remains in place. However, with an uncertain future for at least some state defined benefit retirement systems, increased regulations (such as the final 403(b) regulations) and perceived inequities in some circles between what is offered to teachers and what is offered to other nonprofit employees, some school districts have reviewed alternatives to their current 403(b) relationships. But, given the limited resources at the district level (unlike other nonprofits, school districts lack dedicated human resource departments), change has been sporadic.
States have contemplated offering their own solution of a statewide plan (either the existing state 457(b) or a new 403(b) plan in which only school districts could participate) that would be similar in structure to a health care 403(b) plan, but the record of individual states in this area (e.g. State retirement systems, 529 plans) is mixed.
In addition, in certain jurisdictions laws may require a broader range of service providers than typically represented in plans maintained by health care entities.
Thus, at the present time, public school district plans and health care plans often remain the proverbial “apples and oranges” that our questioner described. However, as the health care 403(b) marketplace has changed dramatically from the earlier days of 403(b), perhaps a similar change will come to school districts. Only time will tell.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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