Fewer Schools Sponsor Traditional 403(b) Plans

It would be premature to signal the end of the traditional 403(b) defined contribution plan, but its long-term future as the favored retirement vehicle for higher education institutions appears to be fading.

In 2015, fewer than two-thirds — 64 percent — of higher education institutions said they sponsored a traditional 403(b) plan. That represents a drop of 11 percentage points from 2014, according to a new report by Transamerica Retirement Solutions.

Nearly half of all higher education institutions — 46 percent — surveyed offered a 401(k) plan last year, an increase of 4 percentage points over 2014.

Roth 403(b) plans, however, saw a big uptick with 48 percent of respondents sponsoring such plans in 2015, an increase of 8 percentage points in 2014, the survey found. Unlike traditional 403(b) plans, Roth contributions are made with after-tax dollars, which means owners do not have to worry about taxes on distributions in retirement.

The 403(b) plan is among the most widely used defined contribution retirement programs among the higher education and nonprofit sectors. It serves as the defined contribution equivalent of the 401(k) in the for-profit marketplace.

At the end of 2014, total 403(b) plan assets amounted to $951 billion and 52 percent of all 403(b) plan assets were held by life insurance companies, according to data from the Investment Company Institute, which represents the mutual fund industry.

More mobility between corporate and higher education researchers and staff, the rise of for-profit schools and pressure to streamline retirement benefits contribute to the erosion of the traditional 403(b) plan in favor of alternatives, the report said.

The findings were published last month in a report titled “Retirement Plans for Institutions of Higher Education.”

Correlation Between Advisor Usage and Planning

The report also found usage of automatic enrollment “particularly high” among colleges and universities that employ retirement plan advisors, “suggesting that advisor recommendation is a major factor driving popularly.”

Automatic enrollment features were reported by 44 percent of institutions in 2015, and automatic deferral rate increases were reported by 24 percent of colleges and universities in 2015, the survey of 250 plan sponsors at higher education institutions found.

“Among institutions that avail themselves of an advisor and have implemented automatic enrollment, 42 percent use a deferral rate of 5 percent or higher compared with 34 percent among other institutions that do without an advisor,” the report said.

“We’ve seen advisors make important recommendations about plan design that can go a long way in helping more employees join the plan and save for retirement,” said Brodie Wood, senior vice president for nonprofit markets at Transamerica Retirement Solutions, in a news release.

Retirement plans that use advisors are more likely to offer a series of asset allocation plan options — lifestyle, lifecycle and target date funds — to participants, the survey found.

The survey found that 56 percent of plans use a target date series as the default investment elections.

A balanced fund is the most common default investment option among institutions that do not rely on an advisor for decision-making, the survey also found.

Advisors Becoming More Commonplace

The May 2015 survey of 166 public and 110 private institutions, found that 17 percent of institutions rely on a retirement plan advisor or consultant. Another 38 percent of institutions said they intended to hire an advisor or consultant in the next 12 months.

Compared with 2014, a higher percentage of institutions last year reported advisor responsibilities in investment section, monitoring, compliance, plan design, a policy statement and vendor selection, the survey found.

In only one category — acting as a plan fiduciary — did a lower percentage of higher education institutions report advisor responsibilities, a drop likely due to the coming changes imposed by the Department of Labor’s fiduciary rule expected any day.

Smaller educational institutions, those with less than 5,000 retirement plan participants, often retain their advisor to act as a plan fiduciary, to help with changes in plan design and craft investment policy statements, or to help with choosing plan service vendors, the report said.

Advisors are most often hired on a retainer basis and 51 percent of respondents pay their advisor an asset-based fee, typically less than 0.10 percent of assets, the survey found.

In addition, 16 percent of respondents said they paid their advisor a one-time-only fee, 14 percent paid advisors a fee on a recurring basis and 19 percent weren’t sure how the advisor was paid, the survey found.

In 2015, 51 percent of institutions met with their advisor on a quarterly basis, 23 percent met monthly, 12 percent met semi-annually and 14 percent met annually, the survey revealed.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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