Consultants supposedly specializing in 403(b) plans emerged as a relatively new phenomenon in conjunction with the finalization of the 403(b) regulations in 2007. As Employers became aware of the new compliance requirements applicable to plan sponsors under the final regulations, they began to look for help from “experts.”
Because many employers relied on their product providers for compliance, they felt that getting help from those same providers was like “having the fox guard the hen house.” So many employers began to look to traditional sources of expertise such as accountants and consultants. Unfortunately, there were very few consultants that were “experts” in 403(b) plans and the quality of the advice/consulting was “spotty,” at best.
One unnamed school district paid a nationally recognized accounting/consulting firm over $20,000 to audit its 403(b) plan for compliance. One of the items listed on the consultant’s report was over $50,000 in fines to the Department of Labor for failure to file the Form 5500 and Schedule A. Remember that public schools are not subject to ERISA and, therefore, do not have to file Form 5500s or any schedules. There was no $50,000 penalty. Fortunately, this employer recognized the mistake, but still paid the consultant’s fee because there usually is no guarantee of quality in a consulting arrangement.
Other reports reveal that consultants who are competent in the requirements for 401(k) plans are attempting to “fit” those rules into the public school segment, yet much of what is applicable to 401(k) plans simply does not apply to 403(b) plans. Many times their 403(b) RFP is just a recycled 401(k) RFP with several totally irrelevant questions and or requirements.
It was reported that a small number of districts, due to the advice of a “401(k)” consultant, moved from a multiple vendor environment to a single exclusive vendor. In many of those situations, the consequences of following the advice of consultants that have not bothered to investigate the differences between 401(k) and 403(b) plans have been unhappy employees, unhappy unions that represent those employees and an increase in potential liabilities for employers. It should also be noted that a common consequence of consolidating to a single provider is a subsequent drop in the participation rate of the 403(b) plan.
In 2018 the NTSA published “Improving Retirement Savings for America’s Educators: A Comprehensive Survey of Public Education 403(b) Retirement Plans.” Following is an excerpt:
“Research conducted by the National Tax-Deferred Savings Association (NTSA) in partnership with the Plan Sponsor Council of America examined the savings rates of public education employees in more than 4,400 school districts across the country. The research examines the impact of participant choice of investment providers in 403(b) plans. The research further looks at the extent to which school district employees want choices in their 403(b) plans and the positive impact choice has on participation and savings rates. The data shows a decrease in the participation rates for 403(b) plans when the number of choices are reduced. While investment provider options may create more administrative complexity for the district, this paper suggests other alternatives to alleviating this burden, such as using an independent third party administrator (TPA) to administer the plan and providing transparent disclosure of investment fees and other expenses to workers.
The research finds that public employees who have access to retirement education resources at the workplace and the assistance of financial professionals are saving earlier and contributing more to their 403(b) plans, and have greater confidence in being able to achieve their retirement goals.”
However, as more consultants have taken the time to investigate 403(b) plans and the unique characteristics, the quality of the consulting and advisory services has begun to improve. As a result, many larger employers are using consultants to evaluate their 403(b) programs, make recommendations and evaluate their product and service providers. Often consultants are used to prepare request for proposals (RFPs) for 403(b) plans. The employer pays a consultant to create the RFP, distribute it to the product providers and other service providers, evaluate the responses and make recommendations on product providers and service providers.
Literally, the consultant’s report can open the door or close the door for interested service and product providers. Because consultants are more familiar with nationally recognized product providers, they often prefer a recognizable product provider who may have limited 403(b) experience over a regional product provider who excels in 403(b) plans. Often, the consultant’s focus is on the financial integrity of the product provider and the number of retirement accounts it services, rather than the services provided to participants and employers. As result of this bias, smaller 403(b) providers and their sales representatives who are seeking to compete in the larger school districts should make themselves known and demonstrate their expertise in 403(b) plans to the consultants active in their region.
RFPs are also becoming a more important means to maintain business. Consultants are using RFPs to reduce the number of providers and weed out non-competitive 403(b) products. Consequently, RFPs should be given top priority. Product providers should make certain that only individuals who fully understand their products, services and procedures respond to RFP questions. Inaccuracies, blank spaces or “routine/canned” responses can knock a provider right out of consideration
Most RFPs are designed to include several key questions that separate the finalists from those excluded. The strength of a provider’s answers to those questions will determine whether that provider is invited to the interview stage. The issuance of RFPs is one of the significant trends in the 403(b) marketplace and it is directly related to the increased presence of 403(b) consultants.
Thomas J. Granger is Second Vice President|Qualified Plans at Security Benefit.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.
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