Pluses to Nonprofits Using 403(b) Plans

In a recent DC Dialogue newsletter from the investment management firm PIMCO, Stacy L. Schaus, PIMCO’s executive vice president and Defined Contribution (DC) Practice leader, discussed the advantages of 403(b) plans compared with 401(k) plans with Ryan Gardner, principal of Fiduciary Investment Advisors, and Mark Wetzel, president of Fiduciary Investment Advisors.

Both Gardner and Wetzel support the inclusion of retirement income strategies and advice for participants, and they believe the perfect DC plan is one with sufficient contributions, limited leakage and the option for participants to convert some or all of their savings into income, something many 403(b) plans offer.

Gardner told PLANSPONSOR, “Prior to July 2007, when the Treasury Department and the Internal Revenue Service finalized the first comprehensive 403(b) regulations since 1964, 403(b) plans had been the plan of choice for many nonprofit organizations. The lack of certain testing and audit requirements, as well as the ability to avoid ERISA [Employee Retirement Income Security Act] regulations made them popular among nonprofit plan sponsors.”

Today, said Gardner, with the new regulations in place, the regulatory framework for 403(b) plans is more similar to 401(k) plans. “The opportunity for some 403(b) plan sponsors to avoid ERISA requirements remains. However, the new requirements are strict. Similarly, the lack of nondiscrimination testing for some organizations, as well as other special catch-up contribution features, may still appeal to nonprofit plan sponsors. While there are a number of pros for both 403(b) and 401(k) plans, ultimately it comes down to the individual plan, plan design and the overall goals and objectives of the plan sponsor.”

Gardner said there have been several improvements to 403(b) plans since the 2007 regulations were passed, many of them benefitting participants.

“One of the most positive changes that has occurred relates to fees,” said Gardner. “For years, fees that were charged within 403(b) plans were less than transparent and in some cases had little correlation to the overall size of the plan and the services being provided to the plan. Shortly after the regulations were finalized, a tremendous emphasis was placed on the transparency of fees, individual plan pricing and the establishment of appropriate benchmarks. Over time, this has led to more appropriate plan fees, the availability of lower fee share classes, ERISA budgets and, for some plans significant fee savings to participants. Today we’re continuing to see the evolution of plan fees with many plan sponsors evaluating new and different pricing models as well as the notion of levelized pricing.”

A copy of the PIMCO article can be found here.