Lawmakers in several states have proposed the idea of
state-run retirement plans for private sector workers, a move that some say
could be bad news for advisers.
Proponents say this idea would allow employees who do not
have access to a retirement plan the chance to save for their future, but
opponents say other savings avenues exist, and that state-run plans could
damage the adviser’s role in retirement plans.
Last year, California passed a law to study creation of a state-run
retirement plan for private sector workers (see “Calif.
Senate Approves Government-Run Private Worker Retirement Plan”). “So effectively it’s a ‘study’ bill,” Aaron
Friedman, assistant vice president of product management at Principal Financial
Group, told PLANADVISER. In addition,
Connecticut legislators are looking at SB 54, which would establish a state-run
plan for private sector workers—modeled after California’s legislation. In
Oregon, HB3436 would create a public corporation charged with developing a
government-run retirement program for private sector workers.
Altogether, 10 states have considered or had legislation
proposing some type of state-run plan for private sector workers since 2008.
Friedman said that with these proposals, “there’s certainly
risk for advisers” who may be pushed out of the system if states cut out the
intermediary. He fears these states are not taking into account the fact that
running a “robust” retirement plan requires education and communication, so
advisers would lose their place in helping with retirement plans.
While Friedman agrees with the goal to give more workers
access to retirement plans, there are already simple, low-cost plans for small businesses.
Jim Szostek, vice
president of taxes and retirement security at ACLI, agrees that plenty of
retirement material is already available in the marketplace. “The idea that the
state needs to create a product to compete … doesn’t make any sense,” he said. Simplified
employee pension (SEP) IRAs and simple
401(k)s are already available in the marketplace, Szostek said.
Instead of
commissioning a study about a state-run plan, California would be better off focusing
on employee education regarding retirement savings, he concluded.
Building a 403(b) Business: Where the Opportunity Lies
In
the retirement plan world, change equals opportunity for financial
professionals, and change has been a constant among 403(b) plans since the Internal
Revenue Service (IRS) passed significant regulations in 2007.
But the biggest opportunity for change right now lies in one
key segment of the 403(b) market:private higher education.How big
is the opportunity?A LIMRA study released
this past May estimates the size of higher education 403(b) plan market to be more
than $320 billion.And the 2013 403(b)
Plan Survey (see “403(b) Plan Sponsors Continue to Improve Plan Value”)from the Plan
Sponsor Council of America (PSCA) indicates higher education plans are ready
for change.
Like many other not-for-profit organizations, private higher
education organizations historically followed the typical 403(b) retail model,
providing employees access to annuity and mutual fund options from several
providers through individual meetings with financial professionals or provider
representatives at the workplace. While these personal interactions have served
individuals, there have historically been no relationships between financial
professionals and plan level decision makers, the people charged with looking
out for the plan and the participant base as a whole.
Many institutions of higher education were
reluctant to upset the apple cart when implementing changes for the final
403(b) regulations effective in 2009. A variety of financial professionals with
various preferences toward providers and products continued to maintain
individual relationships with employees who were vocal about maintaining the
status quo.As a result, administrators made
very few structural changes and simply adopted compliance monitoring procedures
to satisfy the regulations.
Higher education administrators soon learned that monitoring
compliance across several unrelated providers was difficult, if not at times
impossible and often have resulted in violations of the IRS code.The well-documented challenges of coordinating
loans and monitoring hardship distributions across multiple service providers
are just the tip of the iceberg. Other violations have been occurring. For
example, some providers are paying out balances less than $5,000 (per the small
account force-out option) when the participant’s total balance across all
providers actually exceeds this limit. Additionally, contractual differences
between different providers in the same plan are creating discrimination
concerns. For Employee Retirement Income Security Act (ERISA) plans, some auditors
have been charging large fees for the extra work to consolidate reporting
across multiple providers.
Those challenges are wearing on higher education
institutions. The latest PSCA 403(b) Plan Surveyshows they are beginning to take a
hard look at their plan structures and procedures and are open to making
changes. That creates an opportunity for financial professionals with plan
experience to step in and help.A look
at results over the past three years from the annual PSCA Survey reveals
emerging trends and where the opportunities lie for financial professionals.
Ready to RFP
The survey data show the number of higher education plans
that have never conducted a request for proposals (RFP) has been shrinking over
the past three years.In 2010, 35.5% of
higher education 403(b) plans had never done an RFP. That number continued to
decline and in the most recent survey for the 2012 plan year, only 26.1% reported
they had never conducted an RFP.
Many of those who have are overdue to search
again. As of 2012, 40.6% of higher
education 403(b) plans reported they had not conducted an RFP in more than five
years.Financial professionals with RFP
and plan search experience are in a good position to generate a great deal of
new business in this market space.
Too many providers
The data show higher education plans are moving away from
multiple providers to single providers—likely in response to the burdens of
working with more than one provider.The
number of higher education 403(b) plans with multiple providers dropped from
56.1% in 2010 to 47.9% in 2012. With nearly 50% still using more than one
provider, there is a significant opportunity for financial professionals to
point out the advantages of moving to a single provider and help guide the
process.
Less is more
Financial professionals can also demonstrate value by reviewing
the number of investment options offered.According to the 2013 PSCA survey, the number of options available to
participants for their contributions in higher education plans jumped from 55
in 2010 to 65 in 2012. That is more than double the average number for all
403(b) plans in 2012 and opposite the trend in 401(k).Studies, including one done recently by
Columbia University, have shown that too many investment options have a
detrimental effect on participation and overall savings rates.Financial professionals can use their
investment analysis skills to help pare down the investment options to a more reasonable
menu.
Capitalizing on the
trends
Clearly higher education 403(b) plan sponsors are in the
process of reviewing and making changes to their plans.They need high quality retirement plan
professionals to help.Because higher
education institutions have not historically used financial professionals at the
plan level, the first step is to establish your value proposition. You can
demonstrate that you understand the marketplace by becoming familiar with the
emerging trends.Use the data from the PSCA
survey to gain understanding and share it with prospects and existing clients so
they can see how peers are evolving.
Now is the time to capitalize on this trend. Who knows how
long it will be before the next major trend—especially one with this level of
market opportunity—arises in the retirement plan marketplace.
Aaron Friedman is the
tax-exempt national practice leader with the Principal
Financial Group, an
investment management and retirement leader. A noted expert on 403(b) plan
design, he has been consulting with tax-exempt organizations for over 20 years
and has been in the retirement plan business since 1986. Follow Aaron on Twitter @1AaronFriedman1