Are 403(b)s Still Relevant?

Are 403(b)s still relevant? An expert panel at an Oct. 3 session of the ERISA 403(b) Advisor Conference held in Washington, DC discussed how they figure in the retirement universe and their future prospects.

Panelists included Sue Diehl, President of PenServ Plan Services, Inc.; Kim Cochrane, Director of Client Services at Raffa Retirement Services; and Shelly Howard Horowitz, Managing Director of Pensionmark Financial Group. The moderator was Ellen Lander, Principal at Renaissance Benefit Advisors Group, LLC. 

The State of Things

Yes, 403(b)s certainly are relevant, panelists indicated. 

Employees are getting the message about saving for retirement, Cochrane told attendees, and indicated that efforts to educate younger and new employees as they enter the workforce appear to be bearing fruit. “Employees know it throughout their careers now — it is not as hard as before to get them to save.” 

But that doesn't necessarily mean that there is a heavy turn to 403(b)s, panelists indicated. Horowitz reported that she finds that with her clients, “it’s a toss-up” between 401(k)s and 403(b)s. “People sometimes say that 403(b)s are so expensive to run,” added Diehl.

Diehl did offer some hope, however, noting that her organization does not see complaints that 403(b)s are too expensive; not only that, she said that sometimes their cost is lower. 

Tools 

Lander hailed the ability to include auto-enrollment, auto-escalation, and employer matches as plan features as the “best news,” calling it “such a win.” 

An employer match of employee contributions to their retirement accounts is becoming an expectation, panelists suggested. Horowitz said that there are many young employees who now expect one. Cochrane suggested that a match can be effective, noting that their organization has experienced “lots of success” with moving the formula for the employee match as an incentive to drive participation and saving. 

And Lander expressed confidence that auto-enrollment can work. “Don’t lose faith,” she said. 

Future Prospects 

It can be challenging to “sell” 403(b)s, panelists cautioned. “It can be an uphill battle,” Horowitz said; striking a similar tone, Diehl remarked that “sometimes we’re swimming upstream.” “A lot depends on what kind of 403(b) you’re talking about,” said Cochrane.

But panelists also identified selling points. Cochrane said that testing is a matter that augers in favor of 403(b)s. “It really starts with testing,” she said, continuing that ADP tests not being required “is very big.” 

Another factor in favor of 403(b)s, said Diehl, is that late deferrals to ERISA 403(b) are not penalized. She did add, however, that even though there is no penalty, late deferrals still must be addressed and fixed. 

Cochrane stressed the importance of how one refers to 403(b)s with clients and prospective clients. “Nomenclature matters,” Cochrane said, suggesting that it can help if marketing materials refer to them as a “retirement plan.” Lander expressed a similar view, reporting that her company calls 403(b)s “the savings plan.” 

“I think it’s education,” said Diehl, emphasizing that employers in the 403(b) sector tend to be “more paternalistic,” but there still needs to be more education of such employers. 

Diehl not only stressed the importance of educating new advisors about 403(b)s and saving, she argued for showing employers the things that they can do with their employees. Horowitz suggested that educating employer committees and boards is important in advancing 403(b)s. And Cochrane argued that building employees’ saving habits is important. 

Another potential growth area is that of 457(b) and 457(f) plans. Executives “finally are waking up” that they exist, said Horowitz. She argued for making them aware that they can allow transferability of 457s. She also advised making sure that a provider with which one is working can handle a 457 before making an effort to promote them with clients. 

The Bottom Line

So — are 403(b)s still relevant? “I’ve never worked with anyone who, when they are retiring, said ‘I wish I hadn’t saved so much money,’” remarked Horowitz.