Translating 401(k) success into 403(b) success

Is the 403(b) really the red-headed stepchild of the DC business?

The overall numbers may be smaller and the issues related to helping schools and not-for-profit health institutions take care of their retirement planning needs a little more complex, but there are certainly opportunities for cross-coverage success.

That's the finding of researcher Ronald Bush of Brightwork Partners, who shared his wisdom at Tuesday's Center for Due Diligence conference.

The stakes aren't particularly tiny, either, Bush notes: the 403(b) world represented an $805 billion market in 2011 and enjoyed a 4.9 percent overall growth during the past decade; Admittedly, with a $4.7 trillion overall DC market, it's still something of a niche market, but definitely big enough to be attractive, he adds.

With 8.1 million participants and 34,700 plan sponsors across the nation in private and public primary and post-secondary institutions, there are also many opportunities to get in and provide better options and better service. The most significant obstacle is a relatively low turnover of providers and a three- to five-year period of flat growth expected in the space.

Bush's analysis indicates that 403(b)s tend to be significantly more conservative in their asset allocation, with approximately 43 percent in fixed income (versus 16 percent in the average 401(k) plan); domestic equity is also less favored, and life cycle funds are significantly less present than they are in the standard 401(k) arena.

"Unfortunately, there's a huge lack of data in this marketplace," Bush admits. "A lot of plan sponsors don't even know if they're ERISA or not. But the new push for 403(b) compliance has moved a lot more of them into employer-sponsored plans and has really reinforced the idea of fiduciary responsibility."

The legacy market for serving the 403(b) market is grossly inefficient, Bush said, with limited employer oversight and a tangle of old vendors dominating the market. Decision-makers also tend to be less knowledgeable about financial and retirement issues, and there's more likelihood for those school and hospital administrators and boards to be fee resistant, considering theirs is a world with serious low-bidder bias.

"Truthfully, there's quite a likelihood of inheriting a mess in this market," he added. "But things are moving toward the 401(k) model, and that's creating a compelling need for independent advisors."

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