Controlled Access to Providers Can Help 403(b) Participants

A TIAA-CREF Institute Trends and Issues report found that assuming a standard 4% systematic withdrawal rule, an educator in a controlled access state retiring at age 65 will generate about $65,000 more in real (constant 2010 dollars) retirement income and have about $80,000 more in real retirement assets remaining at age 85.   

The report explained that open access management typically allows “any willing provider” access to plan participants. Plan sponsors offer 403(b) plans with limited screening and oversight of the vendors seeking certification. Plan sponsors typically do not negotiate fees prior to certification nor do they monitor the vendors after certification. States using the open access model generally have supplemental 403(b) plans with a large number of providers and investment options, a broad range of relatively high fees.  

Controlled access management limits the number of providers in the plan. Plan sponsors typically use a competitive bidding process that requires potential venders to submit proposals that include information on the investment product menu and associated fees. Fees are often a key factor in the review process. States and school districts using the controlled access model tend to have a relatively small number of choices of providers and investment products, and relatively low overall fees.   

To examine the implications of the method of governmental management of supplemental retirement plans, TIAA-CREF analyzed the experience of four states and found that participants in open access states have a higher likelihood of paying loads (either front-end or back-end) and being subject to surrender charges. The loads significantly increase the total cost to own assets in a retirement plan. 

Surrender charges reduce liquidity and flexibility to move assets to more cost-competitive providers. Participants in controlled access states generally are not subjected to loads or surrender charges.  

TIAA-CREF concluded that transitioning from an open access to controlled access model can enhance the efficiency of the 403(b) plan, resulting in lower fees, and thus increasing wealth accumulation for public school educators. The firm’s simulations indicate that over a 30-year career, a educator in a controlled access state can accumulate between $60,000 and $100,000 more in real (constant 2010 dollars) retirement wealth. On an annuitized basis, this is equivalent to about $4,000 in yearly real retirement income, accounting for an additional 7% income replacement rate on the final year’s salary.  

According to the report, the differences in the regulatory environment of 403(b) plans, both across and within states, are substantial. Some educators are covered by plans managed by the local school district while in other states 403(b) plans are regulated at the state level. There are single vendor plans, small multi-vendor plans (e.g., five vendors), and large multi-vendor plans (e.g., 50 or more vendors). Some systems use a competitive bidding process for vendor access while others allow “any willing provider.”   

TIAA-CREF concluded that this highly fragmented market structure creates system-wide inefficiencies and makes it likely that otherwise similar educators will have very different wealth accumulations due to the variation in the cost of participating in retirement saving plans. A critical component of increasing 403(b) participation is to ensure educators have access to easily understandable, high-quality and low-cost plans.  

The four states examined by TIAA-CREF were California and Texas – open access states and Iowa and Arizona – controlled access states.