More Higher Ed. Institutions Using 401(k)s

The era of non-ERISA 403(b) multi-provider arrangements is going away in the higher education market, according to research from Transamerica Retirement Solutions.

The firm contends that change is happening as plans partner with an adviser or consultant. Greater workforce mobility between corporate and higher education among researchers and staff, the rise of the for-profit higher education sector, and economic pressure to streamline retirement benefits also contribute to the trend.

According to “Retirement Plans for Institutions of Higher Education,” for the first time, fewer than two-thirds of institutions are sponsoring a 403(b) plan, and nearly half (46%) are sponsoring a 401(k) plan. The percentage of institutions offering plans based on individual contracts only has dropped to 40%.

Today, nearly half (48%) of plans in higher education identify themselves as Employee Retirement Income Security Act (ERISA) plans. Two-thirds of institutions rely on one exclusive provider for their plan. Only 24% recognize their program as a non-ERISA arrangement.

The long tradition of universal availability of 403(b) plan salary deferrals impacts the design of all defined contribution plans at higher education institutions. At more than half (55%) of the higher education institutions, employees are eligible to make salary deferrals immediately upon hire.

Many institutions in 2015 allowed part-time staff and faculty to participate in their plans for the first time as they implement new age and service eligibility requirements—often in conjunction with the introduction of a new 401(k) plan. Age 21 is now the most common requirement for plan entry—at 39% of plans. Immediate eligibility for employer contributions is no longer the norm (offered by only 44% of institutions). Three in ten plans offer non-elective employer contributions and an additional 25% offer matching contributions, often up to 10% of pay.

Forty-four percent of plans enroll participants automatically, and an additional 27% are contemplating adding automatic enrollment. More than four in 10 plans (42%) enroll participants at 5% of pay or better. Only 8.5% of participants opt out.

Most institutions rely on a target-date series or custom fund as their default election. Currently, among higher education plans with a qualified default investment alternative (QDIA), 34% use a target-date fund series and 25% rely on a custom asset allocation model.

It appears higher education institutions have embraced stretch-the-match strategies to encourage employees to save more. Employers who matched 10% of pay or more now make up 29% of employers with a matching contribution, up from 18% in 2014.

Private institutions set themselves apart with three-year vesting schedules, and public institutions stretch vesting schedules to 10 years.

Three in ten institutions offer plan loans; loan usage climbed to 22% but hardship withdrawals are contained.

The report is based on a survey of 276 higher education institutions and is available here.