Importance of Retirement plan services
Until recently, the market for 403(b) defined contribution plans-which can be sponsored by public-sector educational institutions, including universities, non-profit charitable organizations (including many hospitals), Indian tribal organizations and churches-was like the Wild West, where anything goes. Over the past few years, new 403(b) regulations have changed the landscape significantly. While multivendor plans remain an option (unlike single vendor 401(k) plans), the 403(b) regulations require plan sponsors to adopt a written plan document and ensure that the plan operates in accordance with its terms. In addition, new mandatory procedures include limits on contributions and distributions and requiring a third-party administrator to monitor employee eligibility.
Unintended Consequences
Since the adoption of the regulations, investment options in 403(b) plans have become streamlined but more limited. Many vendors have exited the market or stopped accepting new contributions, leaving fewer companies and fewer options for participants. This is hurting consumers through reduced competition and possibly affecting their ultimate goal: a comfortable retirement.
Surrender to Fees and Commissions
Fewer vendors and investment options available to participants did not increase the competitiveness or fee transparency, however. Fee structures and commission schedules can vary dramatically among vendors in the same school district. For example, one teacher could invest $10,000 in a fund that pays the broker a 7 percent commission and has a 10-year surrender period (during which, if the fund were sold, the investor would be charged a deferred sales charge). Another employee could invest $10,000 with a competing company (or even the same company) and be offered an investment with a different fee schedule-perhaps lower fees and no deferred sales charge.
Investors in a retirement plan shouldn’t wonder if their colleagues are getting a better deal on fees and investments. In fact, the total amount of assets in a school district, for example, should be taken into consideration and the investments should be priced at the plan level and not at the participant level. Level pricing for fees and advisor compensation is the solution to what some investors perceive as deceptive, misleading or unfair sales practice. It could reduce if not eliminate the concerns of employees wondering if others are receiving preferential pricing based on who they know, who they are or how much they have to invest.
The Solution
School districts should demand that vendors that are allowed to offer 403(b) investments to their employees provide level pricing across the board for all employees-from the janitor to teachers to superintendents. This would foster an environment of competitiveness and fairness and a better understanding of fees. This solution probably will require a third-party advocate such as an independent consultant.
Because the 403(b) market is primarily participant-driven, it is the participant’s charge to negotiate, understand and determine fees. However, the district and its employees could benefit from an advocate looking out for their interests. Making certain individuals responsible for plan oversight in a fiduciary capacity fosters an environment in which participants’ assets are protected from predators and abuse.
No one expects all vendors to adopt the same pricing, because their investments, platforms and services can vary dramatically. However, if each vendor offered one pricing model, employees would be able to evaluate the fees better through greater transparency and disclosures. Typically, investors with more familiarity or understanding of the plan and its investments will remain and invest more money. Plan service providers increase the size of their assets under management, and plan participants save more for retirement. Everyone wins.
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