The New 403(b) Model: Exclusive versus Multiple Vendor Programs

August 20, 2008 ( - There is no doubt the new rules 403(b) sponsors will have to comply with by January 1, 2009, will result in a very different 403(b) plan model. One area already seeing much change is the number of investment vendors that will be used.

Paul Gallagher, Vice President, Service Strategy, Institutional Client Services Business, TIAA-CREF, told attendees of The SPARK Institute’s 403(b) Plans Issues & Answers Forum that sponsors may be considering going to an exclusive vendor for ease of administration and improved fiduciary control. An exclusive provider may also make things easier for participants who are often overwhelmed by too much choice.

However, Gallagher noted, the use of multiple vendors will not only offer more choice in investments but also in provider service models and could lead to constructive competition in the market, bringing down costs.

Don Harris, VP, National Education Markets, AIG Retirement, said there is no single, right answer for all sponsors when deciding on how many vendors to offer in their 403(b) programs. Factors to consider, according to Harris, include:

  • Size and complexity of the plan,
  • Cost of compliance solutions,
  • State statutes on investments and fiduciary duties,
  • Collective bargaining agreements with employees,
  • Distribution of compliance functions,
  • Vendor services and support, and
  • Vendor neutrality.

Harris advised attendees to keep the goal of their program – retirement security for participants – in perspective, and select a model that will focus on participant needs such as education, low costs, and product effectiveness. However, sponsors should also try to balance participants’ needs with their needs – compliant plan administration, he added.

Bruce Corcoran, Senior Vice President, National Markets – Education, AIG Retirement, noted his firm has noted capacity issues with providers. “Everyone is investing in marketing; ask who is investing in infrastructure,” he said.

Contrary to the old world thinking, the 403(b) program is the sponsor's plan, not the providers' plans, Sandy Fotiades, Vice President, Plan Sponsor Services, Fidelity, pointed out to SPARK Forum attendees. She pointed out that sponsors can simplify administration by limiting transactions such as hardships and loans to one vendor.

Fotiades also informed attendees of the advent of consolidation of participant education initiatives. Sponsors should try to get a coordinated effort from vendors to educate participants about the importance of plan participation and investing.

If for some reason, a vendor does not fit post January 1, 2009, Richard Turner, Vice President and Deputy General Counsel, AIG Retirement, warned sponsors that if they deselect a provider after the compliance deadline, the assets under that vendor will still be in the plan, only frozen, and will not fall into the DoL's "good faith compliance" recognition for efforts to have an information sharing agreement in place. Evan Giller, Partner, Giller & Calhoun, suggested sponsors have put provisions in recordkeeping agreements that will survive vendor deselection and hold them to their information sharing agreement.