The K-12 Market Segment, What Advisers Should Know

Those three distinct employer groups have taken on certain unique characteristics in the 403(b) space, with varying demographics, needs, and expectations. For advisers, the expanding 403(b) market represents a significant business opportunity, but it would be a mistake to assume you need only splice your 401(k) practice to the tax-exempt space.

Of the 403(b) plan segments, the K-12 market is arguably undergoing the biggest change under the imposition of the new regulations.

Being an adviser to the K-12 market segment will take real commitment, says William Beale, Director, Henderson Brothers Retirement Plan Services. There will be a lot of hand-holding at first, and actually getting assets into the plan will require a lot of hands-on from advisers both with the plan and with individual participants, Beale adds.

School ‘Project’

Less likely than other 403(b) employers to have a written plan document in place, one of the biggest issues for the K-12 segment is complying with the new IRS requirement that these be in place by the end of 2009, according to Linda Segal Blinn, JD, Vice President, Technical Services, ING.

In order for school districts to adopt a plan, they must get authorization from their school boards. Segal Blinn says ING is hearing from the IRS that they will be looking in their audits, investigations, and compliance checks to see if proper authorization was acquired. K-12 districts are, therefore, looking for specimen plan documents which are now being made available by providers, she notes.

In addition, Segal Blinn points out K-12 school districts do not usually have a dedicated human resources (HR) department or contact, so the person an adviser would be dealing with is most likely the school business official who is not only in charge of benefits, but also purchasing, transportation, and other tasks.

As a consequence, she says school systems will now look to advisers for help with juggling tasks and providing knowledge.

An adviser should partner with a product vendor that not only offers quality investment products, but provides administrative support, suggests Segal Blinn.

On the participant level, Beale says, there will be much facilitation going on at first. Participants will need help getting their money into the new plan. Afterwards advisers can do education, he says.

The 403(b) adviser’s role may emerge over time from a representative for a particular product that has a one-on-one sales relationship with participants to match that of advisers to 401(k)s who consult with sponsors on investments and TPA choice and take on fiduciary responsibility, says Kevin Watt, Vice President of Business Development at Security Benefit.

For this reason, he also suggests an adviser should be aligned with a provider or providers that can meet the needs of clients or they may be pushed out of the market.

Watt says advisers will see a lot of changes in the K-12 market segment going forward. Under the new regulations, the employer will have more responsibility and greater oversight for the plan, and that is expected to result in a reduction in the number of providers in K-12 plans.

There will be more opportunity for qualified advisers to get greater access in working with districts for participant education and enrollment meetings and sponsors will have more opportunity to improve investment options and more opportunity to improve participation; and advisers will have less competition with other advisers in the district.

Advisers to 403(b) plans will no longer be salespersons as before, but will now have an opportunity to be both a consultant and educator to the educators, providing information to make reasonable decisions and choices, according to Watt. New business models will be developed to keep a thriving business.

Beale notes that as the K-12 segment becomes more sophisticated and more sponsors move toward a single vendor model, the business will be easier for advisers. In addition, plans' assets will grow as participation increases and participants move balances to new providers.

The payoff in getting in now will be establishing trusted relationships and establishing a reputation. Advisers that do will get referrals from school districts they serve and possibly from states to new clients.

According to David Hinderstein, President, Strategic Retirement Group, an NRP member firm, reasons an adviser would want to enter or beef up their K-12 business are the opportunity for year-over-year growth potential and that the education sector has been immune to economic downturns.

Watt concludes: "We are a strong believer that an adviser plays a very important role to participants in these plans and an adviser who is educated on 403(b) rules, has a strong relationship with a provider, and who serves in a consultative role with sponsors in getting employees to participate will be in business for the long-term in this space."