Simplified investment platforms are becoming more common for 403(b) plans, and target date funds are among the most widespread investment options, according to the Plan Sponsor Council of America’s sixth annual 403(b) plan survey. The Principal Financial Group sponsored the study.
Aaron Friedman, national tax-exempt practice leader at the Principal, commented on the simplification of investment platforms: “The Principal has certainly seen the trend in the market place toward reducing the number of options available to participants, which we also see in the 2014 PSCA. The number of funds available for organization contributions has dropped to 24 from 27 in the prior year, and the number of funds available for participant contributions has seen an even bigger drop to 26 from 31 in the previous year."
Friedman offers an explanation for these trends. “The drop in the averages seems to be primarily driven by plan sponsors in the education field. For example, in higher education, the average number of fund choices for participant contributions dropped to 45 from 65 in the prior year.”
“We’ve found that it’s been a couple years since the final 403(b) regulations, and higher education institutions made some changes to comply with those regulations,” he says, but some found the administrative requirements too burdensome and consequently are reviewing their options.
This is not a new development, Friedman notes. “This is a continuation of the evolution we’ve seen in the 403(b) world over the past one to two decades. The 403(b) was born in a retail environment, where employees of non-profits purchased products for themselves from retail salespeople,” he says. Friedman says that began to change after ERISA was enacted, and some 403(b) providers began to take a more institutional approach in which the fiduciary has oversight over choosing appropriate investment vehicles for their employees.
The downside of simplifying investment platforms, Friedman says, is the effect it can have on the relationships between advisors and those whom they serve. “It is true that there are very good retail advisors that have good relationships and provide a valuable service to their clients,” Friedman acknowledges; however, he adds, that kind of service is not consistently available across the board to all 403(b) participants.
There is a growing need for assistance in meeting fiduciary duties, Friedman says. “Plan sponsors realize they want to approach their responsibilities in a prudent fashion,” he explains. “ERISA provides a well-documented framework for running a responsible retirement plan, but the plan sponsors realize they are not experts on ERISA. Hiring experts helps them with those responsibilities. I should also point out that advisors are doing a good job of making themselves available to plan sponsors for this help.”
The study found that 75 percent of 403(b) plans offer TDFs, a 50 percent increase since 2009. Of this, Friedman said that there was a sharp increase in the use of TDFs after the qualified default investment alternative rules were issued, but the rate has largely held at the same level for the past few years. And TDFs are the most common default investment option, says the study, with 65 percent using them for this purpose.
Other key findings include:
- 85.2 percent of employees are eligible to participate in the 403(b) plan
- 30 percent of plans allow eligible employees to receive matching contributions immediately
- More than half of plans require employees to be on the job for at least a year before they are eligible for matching contributions
- An average of 76.7 percent of eligible employees have a balance in their employer’s 403(b) plan
- The average participant contribution to the plan is 5.8 percent of annual pay
- 82.7 percent of organizations contribute to the plan
- 42.1 percent of organizations make only matching contributions to the plan, while 22.2 percent make non-matching contributions only
- A majority of organizations provide immediate vesting
- 25.6 percent of organizations offer participants investment advice, and 28.3 percent of the participants take advantage of its availability
- 16 percent of plans offer automatic enrollment
- Participants can borrow against their plan assets in 72.8 percent of the plans, and 76.1 percent of plans allow hardship withdrawals
John Iekel is Senior Writer and Editor for the NTSA Net portal.
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