403(b) plans ripe with opportunity

The public-sector pension crisis could help boost the profile of the only other retirement savings vehicle that governments, schools and public hospitals can rely on to help employees save for retirement: the 403(b) defined contribution plan.

Most in the industry, however, will tell you it’s a challenge to serve the 403(b) market, particularly that slice of plans that are not subject to the Employee Retirement Income Security Act. On the flip side, they’ll also tell you that the market is ripe with potential.

Participation rates in 401(k) plans hover around 70 percent, while participation rates for 403(b) plans is about 30 percent, said Chris DeGrassi, executive director of the National Tax Sheltered Accounts Association, a professional association that focuses on the non-ERISA market and small governmental and not-for-profit retirement plans.

Also see: Health care, higher ed nab two-thirds of 403(b) market

“We’ve certainly seen, with the pressure placed on public employees from the pension side, a need to increase both participation rates and contribution rates [in 403(b) plans]. The way we see it, the demand for investment professionals to engage in and assist in this market has never been higher,” he said.

Total 403(b) assets reached a record $750 billion in 2010. Cerulli Associates of Boston predicted that aggregate 403(b) assets will grow steadily to $1.1 trillion by 2016.

The biggest problem with the 403(b) market, insiders say, is that it still isn’t the 401(k) market.

Specifically, the 403(b) market is, by its nature, focused on individuals because it is a voluntary, supplemental savings program, DeGrassi said. 

Plan sponsors will generally give employees access to numerous 403(b) retirement plan providers, but they don’t offer automatic enrollment, auto-escalation or employer matches. Instead, they just manage an employee’s pre-tax contributions into their selected 403(b) retirement plan.

Because it is up to employees to choose their own investments and investment provider and because their employers offer no incentive for them to set additional money aside, advisors pursuing the 403(b) market have to be comfortable working “belly-to-belly” with plan participants, he said. In the 401(k) model, of course, advisors give advice at the plan level rather than on a personal level.

“The challenge for an advisor is really finding ways to work with the employer to get access to participants to provide the education and professional services (they need) to get them to participate,” DeGrassi said.

That’s not only challenge, though. Additionally, advisors in this niche need to determine whether a potential client is covered by ERISA.

According to the Plan Sponsor Council of America’s 2013 403(b) Plan Survey, more than 76.3 percent of respondent plans were ERISA plans; 16.4 percent were non-ERISA and 7.3 percent were unsure of their plan’s ERISA status.

“There has been an attempt to ‘levelize’ the services and the way plans are run between the 401(k) and 403(b) marketplace, but I’m not so sure that levelization has been that effective,” said Lee Topley, managing director of the retirement plan consulting group at Unified Trust Co.

In most scenarios, school systems and hospitals have multiple providers offering 403(b) plans. Participants pick the provider they want their deferrals to go through. At that point, the plan sponsor wipes its hands of the matter. The relationship is between the service provider and the participant, Topley said.

The Department of Labor would like to see 403(b) plan sponsors held more accountable to their retirement plans.