Editor’s Note: This article was published in the November/December issue of "Market Beat," published by the National Tax Sheltered Accounts Association (NTSAA), the nation's only independent, non-profit association dedicated to the 403(b) and 457 markets.
By Michael Webb
Many advisors who are members of the National Tax Sheltered Accounts Association (NTSAA) identify themselves as either K-14 or ERISA advisors. However, there are no absolutes; I have seen many member profiles of K-14 advisors who have at least a small percentage of their practice consisting of ERISA clients, or vice versa. The purpose of this article is to identify the issues unique to ERISA 403(b) plans that can get practitioners into trouble if they are not familiar with such issues. This is not to say that a practitioner cannot be successful in both the K-14 and ERISA plan markets; however, it does take a rather unique skill set since concepts that are sound in the K-14 world may be equally unsound when applied to an ERISA plan.
Trap #1: Single Vendor vs. Multiple Vendors
In the K-14 marketplace, the use of multiple vendors by a school district in their 403(b) plan is the norm rather than the exception. In fact, if you are a K-14 practitioner, you may be thoroughly convinced, as many are, that 403(b) plans should have as many vendor choices as possible. However, if you bring that mindset to your work with an ERISA plan sponsor, you will have been ensnared by the first trap, as it is relatively rare for ERISA plans to utilize more than one or two providers. In fact, a recent survey conducted by our firm of retirement plans of one particular ERISA market segment, private colleges and universities, revealed that 84% of respondents utilized just one or two vendors for their retirement plan. Why is the single vendor model more prevalent in 403(b) ERISA plans? For a major portion of this answer, one need look further than our second trap: reporting.
Trap #2: Reporting, Reporting, Reporting!
ERISA 403(b) plans are subject to a myriad of reporting and disclosure requirements that do not exist in plans that are not subject to ERISA, such as K-14 plans. Here is a not-so-short list of some of the major requirements:
• A requirement to file an annual report 5500 with the Department of Labor.
• As part of that 5500 reporting, a requirement that all financials of the plan be audited by an independent accounting firm (but only for plans with 100 or more participants).
• A requirement that a summary of the plan document — an SPD — be distributed to all plan participants.
• A requirement that a summary of the 5500 annual report — an SAR — be distributed to all participants annually.
• A requirement that a comprehensive disclosure of all plan fees be delivered to plan participants each year.
Get the picture? I could go on and on, but this is not an article on ERISA reporting and disclosure. However, even with this basic list, I believe that one can easily see how a multiple vendor environment can add great complexity to ERISA plans, specifically with respect to the requirement for annual audited plan financial statements. And, for K-14 plan practitioners, this requirement to assist their plan sponsor clients with what is seemingly an avalanche of documentation may be the most difficult trap of all.
Trap #3: Fees
Related to the reporting issue is fees, which are required to be reported in a comprehensive fashion to participants under ERISA. This includes advisor fees, both direct and indirect (e.g., commissions). Since such fees are reported in detail, they tend to be greatly scrutinized by plan sponsors, to the point where any indirect fee arrangements are quite uncommon except in the smallest of ERISA plans. The more common arrangement is a flat fee, where the sponsor, or the plan itself, pays the advisor a flat dollar amount each year for its services. For advisors accustomed to asset or contribution-based commissions, flat fee arrangements may be a difficult, or even impractical, adjustment. In addition, since fees are so transparent, they tend to be much more scrutinized in ERISA plans, to the point where some plan sponsors may seek the lowest cost advisor regardless of services provided. Thus, it can also be a trap in the ERISA 403(b) world if the advisor does not have a well-articulated value proposition.
Trap #4: Fiduciary Responsibilities
Part of the reason that fees can be overemphasized in ERISA 403(b) plans is the clear fiduciary definition that is present in such plans under ERISA. Unlike the K-14 market, where fiduciary responsibility varies by state, ERISA is a uniform code that binds plan fiduciaries to always act in the best interests of plan participants and beneficiaries. A byproduct of such responsibility is that many ERISA plan sponsors, especially large entities, will request that you as an advisor serve as a fiduciary for the services you perform in an effort to offset some of their fiduciary liability. Since fiduciary liability is personal (though, of course, insurable), this can be another potential trap for an advisor who has never served as a fiduciary and is unaccustomed to what that responsibility entails.
Trap #5: Who is Your Client?
For many advisors in the K-14 world, the individual teachers/administrators remain the primary client, though this is beginning to change with the advent of more rigorous regulation. This client relationship is in sharp contrast to ERISA 403(b) plans, where the employer/plan sponsor is always the client. Unlike K-14, ERISA plan sponsors will often have dedicated HR departments who will be working closely with the advisor.
In addition, with the advent of 403(b) plan audits in the ERISA market, it is not uncommon for the finance department of a client to work closely with the advisor as well. Though I list this client identification issue as a trap, it can actually serve as an advantage for the savvy practitioner, since growing one’s practice one employer at a time can be much more efficient than growing one’s practice one participant at a time.
Conclusion
I think that it is readily apparent that it can be difficult for a K-14 advisor to successfully adapt to ERISA 403(b) plan work. The traps that are present in this market are not friendly to the advisor that merely wishes to incorporate ERISA plans as an ancillary business. However, there are many practitioners that service both ERISA and non-ERISA plans, proving that, with the right philosophy and approach, the traps can be overcome, resulting in a more diversified practice for the advisor.
Michael Webb, TGPC, CEBS, AIFTM, is the NTSAA Education Committee Chair. He is vice president, retirement services, at Cammack LaRhette Consulting, an independent HR benefits consulting firm specializing in non-profit industries.
Copyright © 2012, National Tax Sheltered Accounts Association. Used by permission. Please note that this article is for general informational purposes only and is not intended to be taken as legal advice or a recommended course of action in any given situation. Readers should consult their own legal advisor before taking any actions suggested in this article.
