By Cyril Tuohy
For financial advisors seeking to gain a foothold in the 403(b) nonprofit retirement plan market, the most fertile opportunities lie with the higher education segment and with the small plan category, according to an analysis of the most recent benchmark survey.
Aaron Friedman, national nonprofit practice leader with The Principal Financial Group, said the higher education segment is “starting to pay attention to the need to improve investment strategy.”
Higher education institutions, on average, make 65 funds available for participant contributions, two to three times more than other industries, according to the most recent survey by the Plan Sponsor Council of America. In addition, nearly half of the colleges and universities use more than one plan provider, the survey found.
These are telltale signals that the university plans are ripe for review. “Higher education could be a significant opportunity for advisors,” Friedman said in an e-mail to questions from InsuranceNewsNet.
The 2013 403(b) Plan Survey released by the Chicago-based PSCA found that 16.9 percent of plans in the higher education segment consolidated the number of providers within the past 12 months, nearly more than twice the next highest subcategory — the K-12 education segment.
The 403(b) plans are the nonprofit world’s retirement plan equivalent to the 401(k) in the for-profit sector.
Financial advisors can play an important role in guiding institutions through a plan consolidation and in educating employees about the importance of saving early and often, even in the case of postdoctoral scholars who can afford to put aside only a few dollars a month.
On average, only 63.6 percent of eligible employees in the higher education field contributed to the plan last year, for instance, and the average percentage of salary deferred was 6.7 percent, the survey found.
As a whole, savings and participation rates in 403(b) plans were higher last year compared with 2011, the survey found. Friedman pointed to the improving economy and a better understanding among participants about the need to save. “The positive upward trend in savings and participation rates is what stood out to us this year,” Friedman said.
“Sponsors and participants alike are showing they understand the value of saving in 403(b) plans,” Bob Benish, interim president and executive director of PSCA, said in a news release accompanying the survey results. Deferral rates had increased slightly over 2011, he said.
One of the brightest spots for the segment: 38.6 percent of higher education plans permit Roth after-tax contributions, the highest among 10 other nonprofit industry subsectors surveyed.
In terms of the Roth, though, higher education institutions are way ahead of the 403(b) pack. In 2012 only 23.8 percent of all plans surveyed allowed Roth deferrals, but that was an increase from 21.7 percent in 2011, the survey found.
Friedman also said advisors should look more closely at the 403(b) small plan market because of the opportunities presented by coverage gaps there.
Only 55 percent of small plans offer a target date option, for instance, compared with nearly 75 percent of all 403(b) plans, and only 24 percent of small plans offer target date funds as a default investment option. Nearly 45 percent of small plans still use money market funds as the default investment option.
Only 12.6 percent of small plans with one to 49 participants said they had undergone a comprehensive redesign of their investment plans, and 19.6 percent of small-plan respondents said they were planning to do a redesign in the next 12 months, the survey found.
Only 34.3 percent of small plans have an investment policy statement compared with 52.5 percent of all plans, the survey also found, and only 27.2 percent of small plans retain an independent investment advisor to help with fiduciary responsibility compared with 46 percent of all plans.
In addition, only 12.4 percent of small-plan organizations offer investment advice to participants, compared with 24.4 percent for all plans, and that means new opportunities for financial advisors to step in, help set goals for small plans, and offer advice to participants.
New fee disclosure regulations, which took effect last year, also has meant more discussion around fees. Advisors should use that as an opportunity to explain the fee structures to plan sponsors, and show how they can provide more value to sponsors and participants, Friedman said.
“We think that, like their for-profit counterparts, nonprofit sponsors want employees not only to understand the need to save at higher levels but also the value of having an employer-sponsored plan and the plan services they receive for the fees being paid,” Friedman said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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