Helping 403(b) Clients with Best Practices

The Plan Sponsor Council of America’s (PSCA’s) last 403(b) Survey found 403(b) plans were still catching up with retirement plan best practices, Brad Holterhaus, director of Tax-Exempt Markets at Principal, told a group of attendees of the PSCA’s 69th Annual Conference.

Overall, Principal suggests plan design best practices:

• Automatically enroll participants at a deferral of 6% of salary (While more than half of 401(k) plans auto enroll participants, only 16% of 403(b)s do, the PSCA survey found);
• Automatically escalate deferrals each year up to 10% of salary;
• Do a re-enrollment to sweep in all employees not participating or not participating at a 6% deferral rate;
• Choose an appropriate qualified default investment alternative (QDIA) for the plan; and
• Stretch the match to get employees to save more.

Holterhaus clarified that his discussion was about Employee Retirement Income Security Act (ERISA)-governed 403(b) plans.

Other plan design best practices include streamlining the plan’s investment lineup. Holterhaus noted that the average number of options in 401(k) plans is 19, while the average in 403(b) plans is 29—and the average is 43 for plans in the 1,000 or more participants range.

Using a single recordkeeper can also help streamline the plan and its administration. “About 83% of 403(b)s have moved to a single provider, and we expect that trend to continue,” Holterhaus said.

He suggested a retirement plan adviser can help 403(b)s with plan design and recordkeeper selection, and he shared a case study providing an example about how advisers can help. Holterhaus said one plan sponsor didn’t like its current recordkeeper, but it didn’t know what to do about it. The plan’s payroll provider suggested the plan sponsor freeze the 403(b) and adopt a 401(k) plan instead. Now the plan sponsor has two plans to administer and for which it has to file a Form 5500. Holterhaus told conference attendees an adviser would have led them differently by doing a request for proposals (RFP). He also suggested that best practice is to do an RFP to at least benchmark providers every three to five years.

He noted there are fewer providers in the 403(b) space than in the 401(k) space. Plan sponsors should make sure the provider knows the tax-exempt market, has the technology and investment options needed for plan administration and design, provides participant education, and can administer other plan types such as defined benefit plans and non-qualified plans.