By Cyril Tuohy
Four years after an IRS ruling regarding 403(b) plan sponsors and their responsibility for selecting and monitoring investment options, a “dichotomy” has opened among colleges and universities using financial advisors, according to Transamerica Retirement Services (TRS).
Some institutions rely on plan-level administrators to make plan-level decisions, and others rely on one or more participant-level advisors to guide college professors and faculty about investment options, TRS said.
In a report examining the 403(b) market, TRS doesn’t say whether plan participants perform better under one type of advisor or another, only that the scope of the advisor’s engagement may differ depending on the category of institution.
“In the case of an ERISA (Employee Retirement Income Security Act) plan, if the advisor assumes ERISA fiduciary responsibility for plan-level investment decisions, this same advisor is prohibited from delivering participant-level advice, in many cases,” the report said.
Half of colleges and universities say their 403(b) plan is an ERISA plan, and 18 percent say they are not non-ERISA 403(b) plans. The remainder – 32 percent – say they are unsure, the report also noted.
In the case of a non-ERISA plan – a public university system, for instance – participant-level advisors may also advise the plan sponsor on the selection of investment options, the report said.
The 34-page report, titled “Retirement Plans for Institutions of Higher Education,” sheds light on the role of advisors within the 403(b) market. The 403(b) is the nonprofit sector’s equivalent of the 401(k) market, the corporate world’s defined contribution retirement plan system. The report also offers a snapshot of the 403(b) market.
ERISA plays a more important role in the 403(b) market than in the 401(k) market, even if universities are often larger than many corporations.
Advisors perform a wide range of services for colleges and universities, including selecting investment options (58 percent), monitoring investment options (47 percent), helping design plans (42 percent), developing the plans investment policy and selecting vendors (36 percent), and reviewing compliance (33 percent).
Brodie Wood, vice president and national practice leader, not-for-profit for TRS, said in a statement that advisors and consultants are “powerful allies” when it comes to managing retirement plans in the 403(b) market.
“By increasing the use of advisors, higher education institutions can continue to effectively navigate the many changes taking place regarding retirement plans,” he said.
The report found that 88 percent of the 90 colleges and universities surveyed for the report sponsored a 403(b) plan and 31 percent offered a Roth 403(b) plan. The survey also found that 29 percent of schools offered 401(k) plans.
Between 6 percent and 17 percent of colleges and universities also offered 457, 457(b), 457(f), 401(a), and Roth 401(k) plans. The more plan variety offered by an institution, the greater the need for an advisor to help schools manage their programs.
The 401(k) plan is slightly more prevalent among institutions that rely on financial advisors compared with overall, the report also found.
Schools, however, are moving toward a single retirement plan provider because it’s cheaper. Of schools with more than one retirement plan provider, 44 percent use only two providers, 23 percent use three or four, 10 percent use five and 23 percent use six or more, the report found.
“We continue to be fascinated by the high number of institutions offering six or more providers,” the report said.
Institutions using an advisor have slightly lower average account balances – $61,060 – compared to institutions without an advisor, which suggests that “some institutions may be hiring advisors specifically to address shortfalls,” the report said.
As many as 42 percent of higher education institutions rely on help from a retirement plan advisor or consultant, and 10 percent plan to hire one in the next year, according to the survey.
The larger the school, the more likely it is to use an advisor, and private schools are most likely to hire an advisor in the next 12 months, the report also found. Schools most often rely on independent advisors, the report also found.
A total of 39 percent of respondents said they were “very satisfied” with their advisor, and 53 percent were “somewhat satisfied.” Only 3 percent were “not very satisfied,” and 6 percent were “not at all satisfied.”
Institutions favor compensating advisors by retainer compared to a project fee by 49 percent to 43 percent, with more than half of private institutions paying advisors by the project and 54 percent of public institutions preferring a retainer.
Schools with more than one plan provider favor paying by retainer. Schools with a single recordkeeper prefer a project fee, the report found. In addition 75 percent of schools surveyed said their “assigned educator” visits campus no more than a total of six days over a 12-month period, the report found.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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