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Increasing Participation Rates in 403(b) Plans

This article originally ran on August 26, 2014.

By Market Beat Editor Ellie Lowder, TGPS

Employers are increasingly concerned about low participation rates in 403(b) plans, in particular plans in the public education K-12 market segment where there are most often no matching contributions, and it appears they should be concerned. While recent studies have not provided specifics of current participation rates in K-12, many reports from individual employers tell us that it is not uncommon to see those rates in the 18-20% range. Our industry needs to help concerned employers increase participation with diverse employee education plans. Why does that need to be done?

  • Employers do not have the expertise, the time or the budgets to launch an employee education plan designed to encourage more employees to participate. They need our help!
  • The IRS has increasingly focused on low participation rates as a signal that the employer might not be providing meaningful opportunity for employees to participate or make changes. In fact, it has been reported that IRS Field Examiners are using low participation rates as one of the criteria used in selecting which employers to audit! And, in a webcast done for NTSA by an IRS Senior Staff Specialist and this author, it was made clear that year-round activity using diverse ways to provide meaningful opportunity (which the IRS is referring to as “effective opportunity”) is a requirement.
  • Pension benefits are being reduced (in 24 states the average reduction in the defined benefit plan under state retirement systems is nearly 7% while activities are underway to make negative changes in other states), and there is growing concern about whether Social Security benefits will also be reduced (for those covered under Social Security).
  • Employees who do not participate by saving in their voluntary retirement plans generally will not be able to retire at normal retirement ages. In most of the states (where there are not teacher shortages) this translates into higher budget outgo for the employers to pay “top of the salary scale” earners in lieu of new employees who may earn less than half of the top earners.

Strategies for Increasing Participation

The IRS said in the aforementioned August 2013 webcast that “effective opportunity” requires “consistent” communication, including all of the following elements:

  • New Hire Orientation. Since IRS guidance provides that new employees must be notified of their right to participate within 30 days of hire, with an additional 30 days given to enroll, it only makes sense that an effective communication (such as a generic workshop) be provided.
  • Benefits Fairs and Workshops. Most of the providers will have generic financial literacy workshops in which content includes information about investments, Social Security benefits, and the basic pension benefit, coupled with details of the 403(b) plan, will incent employees to enroll and continue participation in the 403(b) plan. Employers should require that the provider conducting the workshops include a list of all providers in the plan, the types of product(s) offered by each, (e.g., fixed annuity, variable annuity with or without a fixed account, and mutual funds) along with contact information of the financial advisors — or, if none, the web site address where more information can be obtained. Reports of one financial advisor offering workshops tell us that participation between January 2014 and July 2014 increased by 500%, and all approved providers in the plan participated in that increase!
  • Newsletters. Either your TPA or the product providers can contribute articles about your voluntary plans for your newsletters.
  • Websites. Every provider should be required to provide retirement planning tools on each of their websites. Also, each employer should provide a district website with links to the websites of your approved providers. While not all employees are comfortable obtaining information in this manner, you will find that some of the self-starters are.
  • New Year Meetings. This can be fulfilled with frequent workshops held in district locations that permit every employee to attend.
  • Financial Advisors Providing “Face to Face” Meetings with Individual Employees. Employers will want to include in the mix product providers which provide financial advisors available to sit down to help employees understand, and enroll. A July 2012 LIMRA study tells us that 61% of participants working with a financial advisor contributed to a retirement plan versus 38% of those not working with an advisor and 61% of those working with an advisor contributed at a higher rate versus 36% not working with an advisor. Another study from the Insured Retirement Institute (posted in March 2014) sheds additional light on the importance of a financial advisor with the information that, after 7-14 years, the participant will have 99% more in assets, than the participant working without an advisor. There are numerous other studies pointing out the importance of providing access to financial advisors in the 403(b) plan.

The diversity of an employee education plan is vital in meeting the needs of a diverse employee population, and in increasing participation in the employer’s 403(b) plan.