Taming the Wild West 403(b) Market

Marketplace rationalization — and vendor shakeout — is finally coming to the 403(b) world following the enactment of a two-year-old regulation. Both plan sponsors and participants stand to gain better pricing and fewer vendor choices — after the dust settles. Winning vendors expect a jump in assets under management.

Until a few years ago, the $749 billion 403(b) retirement plan market, which covers schools, universities, hospitals, charities, and other nonprofits, was often described as a Wild West of multiple vendors and weak plan sponsor oversight. Now new federal regulations issued by the Department of Labor, which took effect in 2009, have spurred a different sort of free-for-all, with mutual funds, insurance companies, advisors, consultants, and other financial pros pouring in to grab a piece of a market that is simultaneously consolidating and opening up. As these vendors bring with them products like institutionally priced funds, target-date funds, online modeling, and investment advice, 403(b) plans are increasingly resembling their sophisticated corporate cousins, 401(k)s.

“计划赞助商现在明白，这些是具有合规性和行政要求的定义缴费计划，”Tiaa-Cref的副总裁布鲁斯戈尔科兰表示，监督K-14市场。(TIAA-CREF includes two-year community colleges and trade schools with the traditional K-12 elementary, middle, and high school sector.) The 403(b)s are a diverse bunch, ranging from a first-grade teacher’s annuity to the $2.3 billion Purdue University retirement plans, from a local fuel-assistance agency to a national HMO. They break down into five basic groups (all asset estimates are from Cerulli Associates): higher education, with $372 billion in assets; health care, $141 billion; K-12 education, $109 billion; religious organizations, $39 billion; and other charitable organizations, $88 billion. They were created for varying reasons—sometimes as supplements to defined benefit plans, sometimes under ERISA—and thus different vendors and investment vehicles have historically dominated different sectors. Overall, however, TIAA-CREF controls 35 percent of the market, according to Cerulli.

传统上，因为这些往往是个别员工合同，雇主只是向几乎任何想要投球的供应商打开了门。“他们所看到的大优势是选择，”SVP和Massmutual Financual Group的退休服务部门的SVP和销售和客户管理负责人表示。“计划赞助商说，”我不必做出决定，我可以为他们提供所有。“一个工作场所可能有七个，20或40家供应商，从TIAA-CREF到当地经纪人;而一名员工又可能有三个不同的储蓄计划与三家不同的公司。

专家说,问题是一个度的问题haos and inadvertent violations of ERISA limits, rather than fraud or incompetent vendors. For instance, rarely did anyone track the total amount of loans a participant might accumulate from all the disparate vendors. “Plan sponsors did not feel a sense of obligation to provide a consistent approach,” says John Ragnoni, the executive vice president who runs Fidelity Investment’s tax-exempt business. So when the Internal Revenue Service audited the plans a few years ago, it found widespread violations.

The new regulations attempt to bring some order into this world by requiring formal plan documents and specifying that the plan sponsor is responsible for compliance with the laws. Nowhere do the regulations state that a plan must pare its roster of vendors and choose a sole recordkeeper. But that has been the effect, says Marina Edwards, a senior retirement consultant at Towers Watson, because otherwise, “your compliance risk goes way up.” A single recordkeeper can make sure that employees don’t violate loan limits, while still offering a wide range of investment choices through open architecture, Edwards points out.

As traditional client-vendor relationships are upended, the winners will be a combination of big-name firms that offer fancier products and efficiency, and locals who maintain enduring ties. For plan sponsors and participants, one reward should be lower costs. Edwards estimates that streamlined administration can pare plan sponsors’ expenses by 50 to 60 percent, while participants could cut their fees by half or more if they can switch to institutionally priced mutual funds, rather than the retail version or annuities. Yet providers won’t suffer. “The profits should be identical to the profits you’d get in administering a corporate 401(k),” says O’Toole, “because it’s really the exact same work.”

Of course each market is different, with its own quirks, products, consolidation levels, and dominant players. There are some state-by-state differences as well, although the trend is mainly national. Some states, like Ohio, Texas, and Washington, have laws that discourage competitive bidding among local government plans, while others— TIAA-CREF’s Corcoran cites Arizona, Florida, and Iowa—encourage small school districts to consolidate for economies of scale.

Here’s a breakdown of the sectors:

K-12: The K-12 market (as everyone but TIAA-CREF calls it) could be primed for the most change, if anyone can figure out how to accomplish it. The retirement programs were set up like a collection of individual accounts—usually annuities sold by local insurance brokers—not a group plan, and they were seen as a supplement to traditional pensions. That combination of small account balances, personal attention, and high levels of administrative hassle makes it hard for newcomers to break in, says Bing Waldert, a director at Cerulli. “Insurance companies have these agents on the ground talking to participants, these entrenched relationships,” he points out. Moreover, it can be difficult to switch an annuity to another type of investment or a new provider.

However, Fidelity’s Ragnoni and TIAA’s Corcoran say their national brands give them an opening. With 163 retail branches in 39 states, “we tend to find a lot of [Fidelity] financial planners from an area who have one-on-one relationships with the individual teachers already,” Ragnoni says.

Experts say that participants are slowly switching to mutual funds, including target-date funds, although Corcoran concedes that fixed annuities continue to get about half of all new contributions.

Higher education: TIAA-CREF began as a college retirement plan, so it has long dominated here. A recent Cerulli report concluded that “the strong proprietary nature of both TIAA-CREF’s investments and its advisors makes it increasingly difficult for independent advisors or DCIO [defined contribution investment-only] professionals to enter this segment.”

Still, the market is seeing changes, with sponsors consolidating to one or two primary vendors and adding mutual funds. And as they increasingly resemble corporate defined contribution plans, Cerulli’s Waldert says, “traditional 401(k) recordkeepers like Fidelity and Vanguard are going to come in and compete.” Fidelity claims to be in second place after TIAA-CREF.

Health care: Even before the new regulations, nonprofit hospitals and HMOs had been reducing the number of providers, hiring consultants, adding investment options like customized target-date funds, and essentially converting themselves to a 401(k) format. This started a decade ago, says Fidelity’s Ragnoni, “as they started comparing themselves regularly to for-profit health care institutions, which have a preponderance of 401(k) plans.” Moreover, Ragnoni adds, the health care industry has been under particular political pressure to cut costs.

So the excitement for this market lies in its expected growth. Cerulli predicts that assets will jump 40 percent over the next five years, the largest increase of any segment. (Higher education is second, with a 30 percent projected hike.)

Religious and charitable organizations: While these groups are small and often covered by specific regulations, some of them have been pioneers in consolidating and professionalizing, says MassMutual’s O’Toole. He particularly cites Head Start and community action organizations that grew out of the LBJ-era War on Poverty. “They couldn’t handle the confusion of multiple providers,” he says.

The plans tend to be heavy in annuities with some mutual funds, sold by local brokers. Frank Satterthwaite, head of Vanguard Group’s Institutional Asset Management business, says that “as the market develops, we’d keep a close eye on whether it makes sense for us.” One signal would be a bigger movement toward mutual funds. For the 403(b) market as a whole, “there are still differences from 401(k)s,” says Fidelity’s Ragnoni. “But they’re becoming much less so than in the past.”