403(b) PLANS ARE IN COMPLIANCE, NOW WHAT…
* 1/1/2009 guidelines propelled fundamental changes to 403(b) plans; administration, reporting and compliance now mirror that of 401(k)s
* 403(b) plans, however, fall behind 401(k) counterparts in helping participants prepare for replacing income throughout retirement…ie, “retire ready”
It’s been a few years since the revised regulations, handed down by the IRS and DOL, changed nearly every aspect of 403(b) plan administration. Effective on January 1, 2009, these sweeping changes aimed to mimic 401(k) plan management. However, recent surveys indicate 403(b) plans trail their 401(k) peers in critical areas, including:
84% of 401(k) plans use an advisor, versus 47% of 403(b)s. (PSCA, Fidelity)
Independent advisors, who specialize in retirement plan design and education, help participants understand needs, develop and maintain a strategy, and “retire ready”.
68% of 401(k) plans use auto-enrollment, versus 16% of 403(b)s. (PSCA, TowersWatson)
Auto-enrollment, especially when combined with an auto-escalator, is one of the most effective plan design tools for increasing plan participation and helping to improve participant outcomes
403-B-READY OR NOT
* 403(b) plans have historically escaped regulatory scrutiny, this is NOT likely to continue
As the growth of 403(b) plans and plan assets (over $793B) continues, regulators feel more oversight is needed to protect participant retirement accounts. The DOL and IRS are actively hiring and training specifically for this purpose…a process that will only intensify with the DOL’s proposal to expand the fiduciary definition. The unambiguous message to plan sponsors is this: Know your fiduciary role.
Being a fiduciary is not about picking the best performing funds or selecting the lowest cost providers. It’s about having a decision making process that is reasoned, prudent and in the best interest of plan participants. It’s knowing who you are paying, for what services, and if the fee is reasonable.
HOW IS MY PLAN DOING?
* Participant outcomes and income replacement as better determinants of plan health
Previously, plan participation rates and average account balances were viewed as key metrics of plan success. Now, it’s all about outcomes and income replacement. Specifically, what percentage of plan participants are on track to replace 75/80/85% of their income throughout the duration of their retirement years. Participant outcomes provide a clearer picture of the likelihood an employee will be able to retire at his/her desired age.
Surveys show, however, that 403(b) plan sponsors still consider participation rates and account balances as measures of success and are not tracking income replacement percentages. (LIMRA & PSCA)
FOLLOWING THE MONEY
* Plan expenses trending down as plan assets shift from higher cost, opaque annuity contracts to transparent, less restrictive mutual funds
Characterized by higher fees, in general, versus mutual funds, and punitive surrender charges, annuities are not suitable for every investor. For years, annuity contracts, sold by commissioned insurance agents, were by far the most dominant investment option. The gap is narrowing, though. As of 2012, mutual funds held 47% of 403(b) plan assets, compared to 53% held in annuity contracts. (ICI/Brightscope)
403 (b) EVOLUTION
Sponsors have made great strides implementing the 2009 guidelines. With heightened federal oversight, plan sponsors will need to move beyond strictly administrative duties and recognize their fiduciary accountability.
The next evolution of successful 403(b) plans will even more closely parallel their 401(k) counterparts by helping participants achieve better outcomes through enhanced plan design, tracking income replacement ratios, and accessing independent guidance.