PSNC 2010: Building a Better 403(b) Menu
That was a central theme throughout a panel discussion at the PLANSPONSOR National Conference. David Hinderstein, President, Strategic Retirement Group, an NRP member firm, said organizations would do well to adopt similar processes for selecting and monitoring investments that 401(k) plans use, including fee benchmarking, provider benchmarking, having a formal committee formed by board resolution giving them authority to select and monitor investments, having committee members acknowledge they are fiduciaries, using an investment policy statement (IPS), and monitoring the performance and participant usage of investments.
In addition, 403(b) sponsors should look internally for improvements that can cut costs, such as paying more than one provider for the same service, he said. An annual review process with providers, looking at plan demographics and activity can help make improvements to the plan and also let sponsors know how to communicate to participants.
Timothy G. Walsh, Managing Director, TIAA-CREF advised sponsors to make sure their benefits policy informs their investment policy. Sponsors should be concerned about maximizing outcomes for participants. This means not just paying attention to fund returns, but looking at individual returns for participants, which takes into account any changes in contribution level or distribution and transfer activity. In designing the plan, the goal should be to help participants grow wealth or replace income in retirement that they cannot outlive, or both.
When selecting investments, Walsh suggested sponsors use the 80-10-10 rule. Eighty percent of participants are not investment savvy, 10% are, and the other 10% think they know enough and usually chase returns, he said. The plan should have solutions to meet all investors, such as target-date funds and advice for those not savvy, and a diverse choice for others.
Walsh said to also remember that less is more. Confusion can cause participants to not invest properly or to not contribute at all.
As far as provider selection, Hinderstein advised sponsors to find out if there is pressure to use providers’ proprietary funds. “Making a decision on provider could mean making a decision on investment menu,” he warned.
James E. Graham, Partner/Retirement Consultant, CapTrust Advisors, noted that where a plan is coming from is important. If coming from a multi-vendor variable annuity situation, sponsors may want to try to cover asset classes participants are used to being offered. He also said a provider should be high touch and be available.
Hinderstein added that organizations want to match up with a provider they can work well with and that understands their culture. When analyzing requests for proposals (RFP), sponsors should weight answers based on what is important to them.
Graham noted that K-12 plans are often subject to state laws mandating the number of investment choices, and small non-profits are in the same predicament small companies with 401(k)s are in, they don’t have economies of scale. But he said that some providers are stepping in to provide them with the same options as larger plans, and Hinderstein said sponsors need to constantly push to get fair fees.Making 403(b)s Better
Graham said the movement to documentation and oversight of plan activity will make 403(b)s better, but better communications selling the 403(b) plan to employees will improve participation, as well as having metrics in place to monitor that.
Hinderstein told panel attendees that dedicating focus and accountability within the organization will help participants have better outcomes. Sponsors should also provide targeted communications to participants and hold providers accountable for results.
Walsh said simplicity will make a plan better - less vendors and fewer points of contact for participants. “Consolidation is a terrific trend that will help sponsors reduce risk for them and also help participants have better outcomes,” he said.
After consolidating vendors, what do sponsors do about prior vendors and how do they benchmark prior investment choices? Hinderstein said sponsors can’t have the same oversight or control over legacy accounts, especially if they are individual contracts, but they can provide education to participants - tell them what they should look for as contract holder – and use plugs from current vendors to encourage participants to move their assets.
Audio of the panel discussion is here.