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Tip of the Week: Distribution Trends

Editor’s Note: This is an occasional feature in the NTSA Advisor. It is drawn from The Source, a book that covers technical, compliance, administrative and marketing aspects of the 403(b) and 457(b) markets. More information about The Source is available here.

An integral element of the 403(b) and 457(b) marketplace is how information and investment products are delivered to employers and participants. Since most current 403(b) plans are funded through individual annuity contracts or custodial accounts, plan information and investment information has generally been delivered individually by the provider, unlike other qualified retirement plans which rely on employers and plan sponsors to provide the forum for plan related information.

While some providers are shifting to group-based meetings for delivering plan information, others continue to adhere to the traditional model that recognizes the marketplace differences based on individual ownership of funding vehicles for 403(b) investments. As group-based products begin to capture more of the marketplace, the servicing models will certainly shift to more closely resemble other qualified plan models. Following are summaries of the types of service models that are unique to 403(b) and 457(b) plans.

Career Service Agents

Several insurance companies distribute primarily through a dedicated career agency system while others distribute their products and services through multiple service channels. AXA Equitable and MetLife utilize the agency model while Voya and VALIC manage an independent and a career service distribution channel. We are beginning to see more providers moving toward distribution using more than one model.

Independent Service Agents

Independent 403(b) and 457(b) specialists generally offer multiple investment options
through different investment companies or vendors. Although there is no specific study to cite, it is thought that 403(b) specialists are generally contracted with at least three insurance companies, and, through their respective broker/dealers, with a variety of mutual funds.

Usually, the investment options offered include fixed and variable annuities, as well as mutual funds. Many independent service agents affiliate with large broker/dealers or marketing firms that specifically concentrate in this marketplace and provide unique marketing and/or back office support.

Online and Do–it–Yourself (DIY) Service Models

Many investment companies and broker/dealers in the 403(b) marketplace are also offering “self-service” online enrollment options. As a result of the final regulations, it is expected that this access will grow. Many employers believe that their plans should include at least one “low-cost” direct enrollment option to accommodate employees who are “self-starters,” while offering the personalized “face to face” service of a financial advisor for those employees who prefer assistance with deciding to participate in the 403(b) and/or 457(b) plan.

Thus, it is expected that more employers will require vendors to offer online enrollment access for cost-conscious participants and employees who are self-motivated. However, it is not likely that online enrollment will replace the preference for individual consultation. This preference is indicated by focus groups and other surveys conducted by one of the largest public education employee unions as well as the NTSA and ARA (at savemy403b.org). And, we expect it to continue unless marketplace and cost pressures squeeze the products’ margins to a point where the cost of providing such services is prohibitive.