PANC 2012: Advising 403(b) Plans

Don’t assume that just because a 403(b) is serving public education, nonprofits, and hospital and health care cooperatives that assets are minimal, industry experts told attendees of the 2012 PLANADVISER National Conference. These types of retirement plans often have big pools of assets and “can be a rich environment,” said Mary Ellen Mullen, principal with Bridgebay Consulting. She noted that school teachers could be retiring with large estates, there is opportunity to capture rollovers from high-salaried executives, and these entities also have other plans, such as 457s, 401(a)s and endowments.

Advisers to 403(b) plans have a great opportunity to work with these participants at the point of their retirement, noted David Ray, managing director, strategic sales at TIAA-CREF. “With fee compression, most advisers will make money performing due diligence in post-retirement products,” Ray said.

For their part, 403(b) plan sponsors are an excellent market to target—if advisers have done their homework and come well-equipped—due to the groups “herd mentality,” inertia and need for better understanding about how their plans work, Ray said. Once one 403(b) plan selects a plan provider, their counterparts tend to make the same selection without doing extensive research, both Ray and Mullen told attendees.

Get to know these “peer networks,” Ray advised. The key to breaking into this market, he said, is to “look at providers in the market and get to know their business because 403(b) sponsors move in herds and put too much faith in the first service provider that comes in. Having this knowledge—to know this space—is so important going in.” 

Ray also cautioned attendees "not underestimate the amount of time it takes to serve these plans." He added, “Fees are similar to 401(k)s, but it takes twice the time to service a 403(b) plan. Usually, it’s more time for less pay—but you need to invest the time to understand the environment and how contracts work and are priced. Understand the cost complexities of every provider. Usually, it’s more expensive [to serve 403(b)s] because information has to be delivered face-to-face."

Therein lies the real challenge for advisers serving 403(b) plans: the complexity. “There are potential landmines,” Mullen said. “There are a labyrinth of rules and laws. There are even different types of government plans, which may fall under state or federal laws, and church plans, which are exempt from ERISA [Employee Retirement Income Security Act]. Then there is the complexity of the different types of compensation for workers. The nonprofit sector has per diem, union and non-union workers. That is why it is critical for a 403(b) plan adviser to partner with a good recordkeeper or ERISA attorney.”

Be selective in what partner you select, Mullen added. “Payroll providers may not be equipped for 403(b) features, such as converting to a Roth.”

403(b) plan sponsors are receptive to knowledgeable advisers, however—and evidently there is a lot an adviser can teach them. “Many of these plan sponsors do not know they are governed by ERISA, or what it is,” Mullen said. “This is where an adviser could offer fiduciary training.” 403(b) committees and administrators are in industries that are “universally understaffed and overworked, so combine elements of a project” to reduce their workload, Mullen suggested.

Ray added that advisers spend a lot of time helping sponsors understand the responsibilites they "own” for the plan. 

The structure of nonprofit organizations, themselves, is yet another challenge, Ray added. “Many health care organizations are becoming privately owned through acquisitions and divestitures, and with mergers and acquisitions so active in this space, it’s just going to get more complex,” he said. He suggests advisers ask themselves: “Are plans being designed in anticipation of an audit?”

Entities in the 403(b) market often have budget constraints, so advisers need to know if, and how, a client can pay them, Ray said. He stated that plans often are able to support advisers through ERISA accounts. Bridgebay Consulting’s clients pay a flat fee for adviser services, Mullen said, though she expects that to change to more ERISA account use.

An attendee asked what advisers should tell 403(b) plan sponsors that are afraid actions they take will cause them to become ERISA-governed. Ray replied that he suggests sponsors go ahead and become ERISA-governed. “It’s better to become ERISA-governed than have the Department of Labor determine that for them,” he said.