Ellen Lander has worked with 403(b) plans for more than a decade, ever since a hedge fund manager client who also sat on the board of a nonprofit asked her to help improve the organization’s 403(b) plan. Nonprofit plans now make up 40% of her client base, and she’s both gratified and consistently challenged by that work.
“These 403(b) plans have been so misunderstood and so un-loved for a long time,” says Lander, founder of New York-based Renaissance Benefit Advisors Group, LLC. That includes by many plan advisors, she thinks. “Most of the retirement world is corporate, and then you’ve got this ‘little niche’ of nonprofit plans,” she says. Ironically, these not-so-little plans have been around about 25 years longer than 401(k) plans, she says, and have issues ranging from expensive legacy investments to a tradition of ongoing one-on-one participant contact that’s hard for an advisor to handle cost effectively.
“If you want to be in the not-for-profit space, you need to first understand their culture and the terminology nonprofits use, a nonprofit client’s business strategies, and the legacy issues that 403(b) plans have,” Lander says. “You’re not going to help if you don’t understand those things, you’ll hurt. So make sure you know what you’re talking about.”
Of course, 403(b) plans – a retirement plan that is maintained for employees of certain governmental employers (such as hospitals and public schools), churches, and 501(c)(3) tax-exempt organizations – cover a wide gamut of employer types and diverse employee populations, often defying the relatively simplistic design characterizations of its 401(k) cousin. Consider the fee-focused participant lawsuits filed against multi-billion university plans, versus recent reports that the SEC (U.S. Securities and Exchange Commission) is investigating compensation and sales practices in defined contribution plans for K-12 school districts. On the other hand, that scrutiny provides retirement plan specialist advisors an opportunity to help 403(b) plans implement a range of best practices.
“The folks you’re working with at these plans, whether they’re in HR or finance, don’t usually have a lot of experience with overseeing retirement plans. And they are also typically wearing many, many other hats in their job,” says Brian Bartkus, Boston-based supervisory principal and managing consultant at Marsh & McLennan Agency. “So they tend to rely on their advisor more than a 401(k) sponsor, and that’s both good and bad. It’s bad because you do spend more time on them, but it’s good because they do put their faith in you. This business is ‘sticky’: I have 403(b) clients I’ve worked with for 15 or 20 years. It’s because there is a level of trust they have with me, a level of comfort.”
For 401(k) advisors looking to branch out into 403(b) work, five veteran advisors talked about ways that advisors can help these plans:
Governance Best Practices
Earle Allen has worked with 403(b) plans for 29 years, and he’s seen their issues change dramatically. “Back when I started, it was getting people enrolled in the plan, communicating with them, and compliance – the administrative details,” says Allen, a New York-based partner at Cammack Retirement Group, Inc. “Now, there is a much heavier focus on plan committees and governance. There’s been an effort to bring 403(b) plan governance more into alignment with 401(k) plans.”
Plan advisors can help a 403(b) committee start using governance best practices, Allen says. That begins with making sure the sponsor has an updated plan document, and an alignment of what the investment policy statement (IPS) says and how the committee actually selects and monitors investments. He also works with 403(b) committees to put together a charter that spells out how a committee will operate. “Help them define, ‘Why do we exist as a committee? And who should be part of this committee?’” he suggests. “A lot of attention now is focused on getting the right people on the committee.”
Barry Schmitt does a lot of work with university 403(b) plans, and he says their committees have a decision-making process and a culture that can be different than “typical” corporate 401(k) committees. “They often use the term ‘shared governance,’” says Schmitt, senior vice president at CAPTRUST in Richmond, Virginia. Before making significant decisions, often these clients solicit input from a wide variety of people across their campus. “As a result, their decision processes can be prolonged, in the sense that they want to make sure that they cover all their bases,” he says. “They want to make sure that all the constituencies are on board.”
Aligning with the Organization’s Mission
David Hinderstein got his start in the retirement plan business in 1986 by working with 403(b) plans, and he still works with them today. These plans have fundamental priorities in common with corporate 401(k) plans, he says: The sponsors want to manage their fiduciary risk, help their participants retire with dignity, and manage the compliance/regulatory environment.
But 403(b) sponsors are less likely than 401(k) sponsors to have thought through how to align their plan with their organization’s overall strategies and goals, says Hinderstein, president of White Plains, New York-based Strategic Retirement Group, Inc. (SRG). “Traditionally they haven’t had those conversations, and now they are,” he says. “It’s newer to them, so we spend time with them, developing strategy. We’ll talk about the plan statistics, but then we quickly want to elevate the conversation to, ‘How does this compare to your organization’s overall strategy?’ We’ve found that not-for-profit plan sponsors – whether it is an independent school or a liberal arts college or a religious organization – all want to have the conversation on how to match their organization’s strategy to their total rewards and human capital goals.”
Take the time to understand the philosophy and culture of a 403(b) client’s organization at the outset, Allen suggests, because it differs from 401(k) clients. “The major underlying difference is that most 403(b) sponsors are part of mission-driven organizations: They are focused on missions like healing the sick or educating the young,” he says. “There’s a distinct culture at these organizations, and understanding that gives you a better sense of how to align the plan with that philosophy.”
An Institutional Fund Menu
Lander recalls the days when nonprofit employers would allow insurance agents and other salespeople to set up tables in their employee cafeteria, invite employees to come, and let the salespeople sell 403(b) investments to employees individually. “The 401(k) world has always been institutional, and 403(b)s were more individual retail sales,” she says. “Many of these employers would simply open up the door, and whoever wanted to sell something to their employees on an individual basis could come in the door. So you had a lot of 403(b) participants with extremely high-priced investment products that also had large back-end loads.”
Allen also remembers the first-generation 403(b) investments, structured as individual contracts between an employee and the recordkeeper. “The employer was just a conduit,” he says. “Then 401(k) plans came into existence, and their investments were all group contracts.” That started a gradual migration of 403(b) plans to an institutional menu, which continues today. “There are still billions of dollars of 403(b) assets in individual contracts. So it can be hard to get a reasonable offer from an outside provider, because the outside provider is not getting all the assets,” he says. “But you can still set up a new contract that is group-based and introduce new investment options, so no new assets can go into the old contracts.”
Keep in mind that federal regulations restrict what investments 403(b) plans can utilize, more so than 401(k) plans. “These plans can only use fixed annuities, variable annuities, and mutual funds,” Allen says. “There are a lot of investments that a 401(k) plan can use that are not permitted in 403(b)s. They can’t use CITs (collective investment trusts), for example, which can do a nice job of keeping investment costs lower.”
Advisors can demonstrate real value when they help 403(b) sponsors modernize their investment menu to a simplified number of institutionally priced investments, organized in a “tiering” approach that’s understandable for participants, Schmitt says. “Historically, it has not been uncommon for these plans to offer the full array of funds their provider has,” he says. “So we talk to these sponsors about paring down the menu when appropriate. Our overarching view is to try to eliminate distractions, to help participants make better decisions.”
Help Participants Transition to Lower-priced Investments
Some 403(b) plans now have low-priced institutional options similar to 401(k) plans, Hinderstein says. But sometimes a significant amount of a plan’s assets remain in less-transparent guaranteed products that can’t be moved without the individual consent of participants who hold those assets. “As an advisor, you can help participants move that money from higher-priced investments to lower-priced investments,” he says. “And in some cases you can negotiate with (guaranteed product) providers on participants’ behalf. There is a lot you can do. You have to tackle it, because running away from it doesn’t help.”
Lander has seen a lot of 403(b) participants still stuck with “some pretty bad (retail) annuity contracts” they entered into years ago. “A knowledgeable 403(b) consultant will recognize that these assets cannot be controlled by the plan sponsor,” she says. “So as an advisor, these annuities are constantly hanging over your head. It’s frustrating. All you can do is get in front of the employees and talk to them about the old annuities and how they compare less favorably to the new funds and structure.”
It’s hard work to convince participants who’ve been in individual contracts for years to switch into a plan’s institutional mutual funds, Allen says. It means dealing effectively with participant inertia, and also trying to reach some participants who no longer work at the organization. “The way to get them to move the money is to explain the benefits to them of moving the money,” he suggests. “You need to have a good story to tell. Usually, if people switch, it’s a function of the pricing. You can explain, ‘Look, this variable annuity you have costs 2%, and you can move to mutual funds in the plan that cost 0.5%, and here’s how much that difference in fees is going to save you over time.’”
Recordkeeper Consolidation and Fee Benchmarking
There has been a lot of progress in the 403(b) space over the past decade, Schmitt says. “But if you look at the evolution of the 401(k) space, the 403(b) space is about a decade behind,” he says. For example, it’s not unusual for these plans to have multiple recordkeepers. “Ten or 15 years ago, it was not uncommon for a 403(b) plan to have four, five, or six recordkeepers,” he says. “Today, we work a lot on helping these sponsors consider the advantages and disadvantages of vendor consolidation, whether that is to a single recordkeeper, two, or three recordkeepers.”
These sponsors also understand now that they need to ensure the ongoing reasonableness of their plan fees. “Because of all the lawsuits against 403(b) plans, obviously we’re doing a lot more fee benchmarking,” Bartkus says. “These plans may grow slower than 401(k) plans, but they are growing, and they do have some leverage.”
Participant One-on-Ones
The participant side of 403(b) work differs from 401(k) work, Bartkus says. “It’s a lot of one-on-one meetings, a lot of person-to-person help, and I enjoy that,” he explains. “Advisors I know who only work in the 401(k) space will sometimes say to me, ‘Oh my gosh, you talk to the participants directly?’ Lots of 401(k) advisors don’t do that.” But many 403(b) participants need individual help to save for retirement, he says, because they tend to not make a lot of money and not have much experience with finance and investing. “In many cases, if I don’t sit with them and explain what to do to sign up and how to fill out the paperwork, they may never do it,” he says. “So they’d never start saving for retirement.”
Working one-on-one with 403(b) participants also can mean adjusting expectations for an advisor used to 401(k) plans. “For me, it’s mostly about being understanding and empathetic,” Bartkus says. “Be empathetic that a $5 or $10 payroll contribution, while it may not be enough to save for retirement, is something. I think advisors who don’t have a history of working with 403(b) plans need to understand that it is okay to help them contribute just a little bit.”
The service model in this market also has traditionally been to have more direct participant contact when “disruptive events” like a recordkeeper switch or investment-menu consolidation happen, Schmitt says. “We tell plan sponsors that we’re going to receive phone calls or emails from a small number of participants,” he says. “There is no doubt that there are going to be people upset when you reduce the investment choices and/or eliminate vendors. So we work with plan sponsors on strategies to mitigate the volume of calls that we’ll receive.’” That can mean proactively doing on-site meetings to explain the changes happening and give employees the opportunity to ask questions and voice concerns to someone other than their employer.
In his years working with 403(b) plans, Hinderstein has seen that different not-for-profits have different levels of engagement within their employee population. Don’t presume to know what motivates them, he suggests. “It’s really getting in there and understanding what gets their employees to act,” he says. “We do that by having conversations with them. We’ve had focus groups at many of our not-for-profit organization clients. We ask employees, how do they feel about their retirement plan, and why? What do they wish they had in the plan that they don’t? Do they anticipate retiring from the organization, and if not, why not? As the advisor, you’ve got to do the work if you want to get the answers. You can’t just look it up on Google.”
NOTE: Look for the special session on working with 403(b) plans at the 2020 NAPA 401(k) Summit, April 26-28. More information is at http://napasummit.org.
Judy Ward is a freelancer specializing in writing about retirement plans. This article originally appeared in the Winter 2019 issue of NAPA Net the Magazine.
