The Big 403(b) Opportunity for Financial Professionals: Small Plans

May 11, 2010 - 403(b) plan sponsors have had their hands full. Regulatory changes in the final 403(b) regulations from the Treasury Department and new Form 5500 and auditing requirements from the Department of Labor have required all 403(b) plan sponsors to review their plans’ documents, operational and compliance procedures, and fiduciary processes.

The just released 2010 PSCA 403(b) Plan Survey, conducted by the Profit Sharing/401k Council of America (PSCA) and sponsored by the Principal Financial Group, reveals that many plans have made the necessary changes. But there is still a great deal of opportunity for advisers to help those who haven’t, especially in the small end of the market place.     

The 2010 study shows that nearly 57% of 403(b) plan sponsors made changes to their plans because of the new regulations. While that is a higher percentage than had anticipated making changes (41%) in the 2008 403(b) plan survey, there are still a significant number of plans in need of assistance.   

Nowhere is that more true than in the small plan market. If we break the numbers down by plan size, nearly 70% of medium to large plans report making changes in response to the regulations. However, only 48.3% of small plans report taking action.  What’s more, the majority of small plan sponsors are currently not working with an adviser. Only 26% of small plans report they have retained an independent adviser to assist with their fiduciary responsibility, compared to 63.6% of large plan sponsors.     

The small market is an attractive opportunity not only because it is under served, but according to the 2010 survey, small 403(b) plans have average account balances in excess of $66,000, far higher than average 401(k) plan account balances.  

There are several areas where advisers can help. 

  • Educate plan sponsors about their ERISA status: While 7.1% of all 403(b) plans report they do not know their ERISA status (down from 10.9% in the 2008 survey), 13.7% of small plans do not know their ERISA status. Advisors can help them understand that ERISA compliance is extremely important, from having fiduciary processes in place to helping ensure their Form 5500 is timely and accurately filed. With recent additional guidance from the Department of Labor, many plans that didn’t know their ERISA status in the past have recently discovered that they are in fact subject to ERISA.  These plans need assistance implementing fiduciary procedures as well.
  • Help them establish an investment policy and strategy: Only 27.3% of small 403(b) plans report having an investment policy statement. Oftentimes the plan’s investment lineup has no coherent strategy, or several providers may be used where there is no effective coordination of contractual provisions or administrative procedures. All of these could lead to plan compliance problems under ERISA or the final 403(b) regulations. Clearly there is a strong need for adviser assistance in developing an appropriate strategy for the investments offered under the plan.
  • Conduct a plan review: Since only 48.3% of small plans have made changes to plan design, there is plenty of opportunity to review plan provisions to help ensure the plan is meeting the needs of both participants and the plan sponsor. In addition to making technical changes necessary for regulatory purposes, many larger plans have used the review as an opportunity to add automatic enrollment, or modify loan provisions. Others have taken the opportunity to formalize their ERISA status and embrace a single provider approach. Advisers can help smaller 403(b) plans follow suit.

The survey shows that overall, 403(b) plans are adapting well to the new regulatory environment, but small plans continue to lag in the process. Advisers with 403(b) experience are in an excellent position to help lead small 403(b) plans into effective and efficient employee benefits that are valued by employees and help meet the needs of the plan sponsor.  

Aaron Friedman is the national practice leader for non-profit consulting with the Principal Financial Group. A noted expert on 403(b) plan design, he has been consulting with non-profit organizations for over 15 years and has been in the retirement plan business since 1986.