Study Finds a Changed K-12 403(b) Market

November 10, 2009 ( - A followup to last year's survey of K-12 districts by LIMRA finds a markedly changed 403(b) market segment following the effective date of new IRS regulations.

The survey found overall, respondents are more likely to be “very familiar” with the new 403(b) regulations than in July 2007 (66% versus 56%). However, LIMRA warned that the 403(b) K-12 market is still in flux and may face another round of changes after the IRS begins auditing these plans.

According to the survey report, the use of third party administrators (TPAs) has grown significantly from 31% in July 2008 to 77% in March 2009. Nineteen percent of districts not currently using a TPA would be willing to do so in the next 12 months.

In addition, as last year’s survey results predicted (see Service, Investment Choice Top Factors in 403(b) Vendor Selection ), there has been a reduction in the average number of vendors allowed in districts’ 403(b) plans – from 14 on average as of January 1, 2008, to seven in March 2009.

However, few districts (6%) have adopted a single provider approach, and most plans will likely continue to have multi-vendor arrangements, LIMRA said. Thirteen percent of responding districts plan to change the approved vendors for their 403(b) plan in the next 12 months and an additional 22% don’t know if they will do so.

A majority of districts indicated they were compliant with the new regulations as of January 1, 2009, (87%) and have a formal written plan in place (98%). Districts with fewer than 250 full-time employees were especially likely to report having met all of the requirements (91%).

Just over a third (34%) of respondents indicated they used the IRS model plan language to construct their plan document, and over a third said they used a sample document from a vendor. Just under a quarter (24%) said they used a TPA’s sample document or assistance to get their written plan in place, and 21% reported using an attorney.

Most written plans allow for hardship withdrawals (88%), transfers (86%), loans (76%), and rollovers (76%). Sixty-two percent allow contract exchanges. Despite speculation that plans might stop allowing transactions such as hardship withdrawals, only 2% of districts offer none of the listed transactions.

Seventy-eight percent of districts currently have agreements to share information in place for all vendors.

Most districts reported they have taken steps to help employees understand the new 403(b) regulations. They indicate a greater reliance on information provided by TPAs rather than vendors for employee communications (68% versus 54%).

As found in last year's LIMRA survey of K-12 403(b) plans, a majority of districts identify employee service (63%) and choice of investment funds (55%) as important factors in selecting a vendor for their retirement plan. Nearly half (49%) of districts indicate that fees for participants are a very important consideration when selecting a 403(b) vendor.

According to the survey report, 48% of districts indicated that employees played a role in the selection of vendor(s) for their district's 403(b) plan, beyond union or bargaining group involvement.

The most common service received by vendors is online access to account information for participants (73%). Seventy percent reported their vendors perform contribution and distribution compliance monitoring, and 61% said they receive online access to plan information for administrators.

Although administrators identify participant services as the most important factor in vendor selection, 95% of districts would not agree to additional fees for any value-added services.

Seventy percent of districts report no issues with vendors not processing transactions allowed by the written plan. Only 6% said they are not satisfied with the services that vendors have provided their districts. Districts that have no need for further assistance from their service providers with regard to 403(b) plan management or compliance are more likely to be very satisfied with vendor services (58% versus 32%).

The most common services districts receive from TPAs are compliance testing (96%), contribution and distribution compliance monitoring (95%), and recordkeeping consolidation (93%).

The survey results indicate there still seems to be some confusion over TPA fees and which parties will pay them. Thirteen percent of districts think there are no fees for services that TPAs perform, and 3% don't know who pays the TPA fees. However, 49% indicated the district is paying TPA fees, and 24% said employees are.

Nearly three quarters (74%) of all districts indicated they need assistance (major or minor) from their service providers (vendors and/or TPAs) with regard to 403(b) plan management or compliance.

Needed assistance/services cited by respondents included:

  • Sample disclosures for participants;
  • Employee education, including independent education and advice and information on the distinction between vendors and services they offer;
  • Improved response time to employers;
  • Automatically produced reports to employers;
  • Ongoing communication on regulatory issues; and
  • Help with asset transfers and rollovers.

A couple of respondents indicated their TPAs were unable to handle the workload or did not have their systems working properly.

The study was conducted in collaboration with the Association of School Business Officials International (ASBO), among active members of ASBO that work in a K-12 school district and have involvement/influence in decision making for retirement plans. The survey received 274 usable responses.

For more information on LIMRA's 403(b) research, contact Cecilia Shiner at .