403(b) plans becoming more like 401(k)s

Not-for-profit  403(b) retirement plans continue to grow and adapt to new regulations and a volatile economy, according to a new study by the Plan Sponsor Council of America. Many have taken to emulating their private sector counterparts in the 401(k) market, adhering to guidelines set forth in the Employee Retirement Income Security Act (ERISA).

As part of  “403(b) Plan Response to Current Conditions,” PSCA surveyed 579 not-for-profit organizations that sponsor 403(b) retirement plans to determine how they are responding to economic and regulatory changes taking place in the market.

The survey, which was sponsored by The Principal Financial Group, found that the number of ERISA-compliant plans has grown dramatically and the number of non-ERISA plans has shrunk.

“We’re seeing the ERISA portion of the (403(b)) system adopting innovations that are part of the 401(k) system,” said David Wray, president of PSCA.  Many 403(b) plans are implementing automatic enrollment, tightening up their investment schedules and doing a better job of educating their participants, Wray said, and even though the 403(b) system lags behind the 401(k) market by three to five years, “there is definitely more cross communication between the two types of plans,” he said.

Wray estimates there are 60 million participants in the private defined contribution system and about 10 million people in the not-for-profit arena.

Competition in the 401(k) market has driven much of the innovation and adaption to changing circumstances, he said, so it makes sense that the smaller 403(b) system would start emulating certain aspects of the private sector retirement system.

Regulators have been “forcing a larger percentage of the 403(b) market to become like the 401(k) market, forcing the requirement that there be an employer fiduciary and that there be reporting on a plan basis, so those things which we take for granted in a 401(k), they are forcing on 403(b) sponsors,” he said.

There is an ongoing effort to make sponsors in the 403(b) space more responsible to their participants and be as accountable as their 401(k) counterparts.

Many 403(b) plan sponsors let their employees pick who they want to have their individual retirement plan with. The employer takes no fiduciary responsibility for the choices.

“When you have an individual arrangement with a provider and there is no employer intermediary, you certainly have situations where there are no problems and everything is appropriate, but basically you have a large number of unsophisticated people and there have been some abusive arrangements,” he said. “There have been situations where those arrangements are not in the best interest of participants. Regulators have said, ‘we think that the way to prevent this is to make plan sponsors have responsibility.’ With a 401(k) you never have those kinds of situations.”

It is harder to take advantage of plan participants if the employer is watching. By complying with ERISA provisions, the Department of Labor and the IRS have more authority to oversee plans.

“Changes have happened to these plans because of regulations and because of the need to take a hard look at what they are doing,” said Aaron Friedman, national practice leader, non-profit, for The Principal Financial Group.  Sponsors of 403(b) plans have realized that an “open-ended multiple provider plan isn’t necessarily the best sort of arrangement for participants. There is no consistency of education, no consistency of message, no consistency of products with multiple providers. Participants are on their own.”

He added that he has seen a trend toward consolidation of providers, with many choosing just one provider, which is “taking a much more responsible ERISA approach.”

Many of the PSCA report’s findings point to a need for more advisors serving the small 403(b) plan market, Friedman said. Even as the larger 403(b) plans consolidate their investment options and provide more education to participants, the smaller plans have not responded at the same level, even though the same regulations and market conditions exist for both.

The survey found that 64.5 percent of larger plans, those with more than 1,000 participants, changed their investment lineup in the past year, but of smaller plans, with 1 to 49 employees, only 15.4 percent changed their investment lineup.

“I don’t think that those plans do a better job of picking investments to meet the needs of the plan. Nobody is looking at it with the diligence they should be,” Friedman said. “There is an opportunity for advisors to step in and help them.”

More than 78 percent of larger plans increased their educational offerings, according to the report. Anytime there are new regulations, companies have to implement new procedures and provisions and educate participants about the changes, he said.  Only 40 percent of small plans increased their education. “It shows that gap, where they are subject to the same sorts of changes, but they may or may not be putting those into place,” Friedman said.

Many of the changes taking place currently are a direct result of the economic downturn that began in 2008. Like their 401(k) counterparts, participants in the 403(b) retirement market were shocked by the decrease in their retirement plans after the stock market dropped. That brought additional awareness on both the regulatory and plan sponsor sides that more oversight and education was necessary if people were going to have enough savings to retire, Wray said.

In the non-ERISA 403(b) world, plan sponsors don’t provide education at all. Participants go to the cafeteria and sign up for one of multiple plans that are being offered. The only responsibility the employer has is to send money from its employees’ paychecks to the plans they have chosen, Wray said.

“Some of the changes in the 403(b) market, like the adoption of automatic enrollment, have come out of the fundamental recognition that if they are going to have a defined contribution plan, to be successful at the highest level, they are going to have to have significant employer involvement,” he said.

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