K-12 403(b) Plan Participants Hungry for More Retirement Planning Help

Participants need more information about how their plan and investments work, a survey reveals.

The majority of K-12 public school employees polled by the Center for State and Local Government Excellence (SLGE) and ICMA-RC—70%—are offered a traditional defined benefit (DB) plan. Of those employees, 87% participate.

Fewer employees—55%—are offered a defined contribution (DC) plan. When they are offered one, 76% choose to participate.

It is concerning that approximately one in five K-12 public school employees said they were unaware if their employer offers a DB plan (18%) and/or a DC plan (22%).

While models have changed for some K-12 districts’ 403(b) plans, the market for those plans differs from other retirement plan markets in that participants often have their own investments—mostly individual annuities—through which they have a relationship with a financial professional. It’s possible some participants don’t realize these investments are part of a DC plan offered by their employer.

More than one-third—35%—of K-12 public school employees with a DC plan said they review their results quarterly, according to the survey report from SLGE and ICMA-RC. About one in five respondents reported they review their results at least monthly (20%), semi-annually (16%) or annually (18%).

When it comes to investing and managing their DC plan account, just over half—52%—of respondents said they are somewhat comfortable doing so, while 21% are very comfortable investing and managing their accounts.

The traditional K-12 403(b) plan model resulted in the bulk of investments by participants being in individual annuity contracts. Transferring participants out of individual contracts is a complicated process. First, they must give consent to move money out, and this often incurs fees. Mutual funds were not sanctioned as permissible investments in 403(b) plans until the Employee Retirement Income Security Act (ERISA) was passed in 1974. According to Troy Dryer, AIF [Accredited Investment Fiduciary], vice president of business development for Investment Provider Exchange (IPX) at FPS Group in Denver, Colorado, K-12 403(b) plan participants early on had limited access to mutual funds. “Open architecture happened in the ’90s, [which gave] participants a broader fund array,” he says.

Overall, respondents to the SLGE/ICMA-RC survey have more favorable than unfavorable views of both annuities and mutual funds. Forty-five percent have a somewhat or very positive impression of annuities, while 57% have a somewhat or very positive impression of mutual funds. However, nearly one-quarter of respondents indicated they knew too little about annuities to have an impression, and 17% said the same for mutual funds.

About three-quarters of respondents reported some level of knowledge regarding the benefits/income provided by annuities, the costs/fees associated with the vehicles, how they work in general, and whether those offered through their employer plan provide a guaranteed level of income for life. One in five reported being not very knowledgeable or not at all knowledgeable about each of these things.

Of note, a large percentage of employees were unsure whether their employer gives them the option to invest in annuities (40%) or mutual funds (35%) through their DC retirement plan.

K-12 public school employees report varying levels of confidence when it comes to making retirement plan decisions on their own. While 30% report being very or extremely confident, 35% report being either somewhat confident or not very/not at all confident.

To make decisions about their retirement plan, respondents seem to turn to a variety of sources for information. Forty percent said they consult a friend or family member who is not a financial professional, 34% consult a financial professional associated with their employer, 32% the financial services company that provides their retirement plan and 32% their employer—e.g., the human resources (HR) department or HR manager.

Yet, the resources they said they trust “some” or “a lot” to deliver objective retirement plan information are the financial services company they use for banking/investing (71%), the financial services company that provides their retirement plan (70%), a financial professional not associated with their employer (69%), or a financial professional associated with their employer (63%).

Help Wanted

The majority of survey respondents—73%—said they would like to receive more information from their employer about their retirement plan or retirement planning—30%, wanting significantly more information. More than half indicated they specifically want to better understand the tax rules governing their plan (58%) and what costs/fees might be associated with it (51%).

Other areas of strong interest were how annuities work and whether they make sense for the individual (43%), how much money one can expect to receive from a DB plan when he retires (42%), and how a DB plan works (41%).

Respondents were somewhat split as to how easy they find it to identify, understand and navigate financial information. While 55% said they find it fairly or very easy to identify the right resource to answer questions relating to benefits, financial planning and their retirement plan, 38% find this fairly or very difficult. Similar results were found for understanding the benefits package offered by their employers, determining which options are best for them, and navigating all the retirement plan options available to them.

Forty percent agreed with the statement, “I’m overwhelmed by the retirement plan options available to me.”

There is still a debate over the best model for K-12 403(b) plans. A survey by AXA Equitable Life suggested that K-12 educators who work with a financial professional have better 403(b) plan outcomes and are more confident than those who do not, which supports the use of the traditional model. However, those who support using a single provider for 403(b) plans say it offers more cost transparency and helps participants who have little or no investing acumen make decisions.

The SLGE/ICMA-RC survey of 400 full-time state and local government K-12 public school employees was fielded by Greenwald & Associates from March 12 through March 19.