Tip of the Week: Establishing Relationships with Public School Systems

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.

This is the first installment of a series of tips concerning establishing relationships with plan sponsors for elective deferral 403(b) programs. This week’s concerns establishing relationships with public school systems.

The final regulations impose new challenges to providers and financial services representatives attempting to establish a new or maintain an existing 403(b) payroll relationship as many 403(b) employers reduced the number of 403(b) product providers. As a result of reducing providers, employees may feel they are not being provided with ample choices. It is important for employers to offer a selection of annuity contracts and custodial mutual funds, as well as full service and reduced service options to accommodate the needs of every employee. As demand for a reasonable selection of choices continues it is likely that employers will be responsive to inquiries about products that may not be currently offered in the plan.

When approaching employers for approval of a new product choice, it is important to know
which products are currently offered in the employer’s plan to ensure that the new products do not duplicate an option already available to participants. It will also be important to remind employers approving a new product and provider that the new provider must be added to the list of authorized product providers in the plan document since providers are required to be identified. Lastly, it is essential that you understand each employer’s approval process, which can vary greatly.

Public School Systems

Approval requirements vary greatly by state and district. There are a few states (including California, Massachusetts, Ohio, Texas and Washington) where state legislation requires that school districts accept all product providers who are properly entered to do business in that state and who will sign a Hold Harmless or Service Provider Agreement. In certain states (such as California and Texas), the provider must take the additional step of being listed on a state registry which is administered by the applicable state retirement system. If your providers are not approved, you should gather the information on the process to obtain that approval. The process may include:

• Completion of a questionnaire or a Request for Proposals (RFP). RFPs are a growing trend in larger public schools. Some RFPs are seeking the lowest cost products or investment options, as opposed to products which are priced for individual servicing. The product provider(s) should complete the questionnaire by providing as much of the information requested about the provider specifically. For example, a growing number of employers are using questionnaires and RFPs to request assurance that the provider(s) will supply compliance support and the sharing of information because of final 403(b) regulations.
• Execution of a Hold Harmless or Service Provider Agreement: A copy of the agreement must be sent to each product provider or to the third party plan administrator. Many product providers will sign these agreements provided they are reasonable in scope. However, many employers will not permit any changes to be made to their standard agreement. If that is the employer’s position, it is important that the insurance and mutual fund companies offering products are aware of this requirement. However, companies’ legal advisors may have concerns with certain standard provisions and the effect on the company.
• Minimum number of participants: This requirement varies significantly from as few as five participants to as many as fifty. The difficulty in satisfying this requirement is that no guarantee of the start date can be made to a participant because access to the participants is granted only when salary reduction agreements are submitted for the minimum number required.

Because of the final 403(b) regulations, many public school districts are reducing the total number of vendors permitted to hold payroll slots (in states where state statues permit). Additionally, a number of insurance and mutual fund companies exited the 403(b) market or at least certain segments of that market prior to 2009. Thus, it is important for employers to carefully screen providers/vendors. Even in the states where “open market” statutes exist, employers are discovering that many providers are unable or unwilling to supply all of the information necessary to meet compliance requirements.