Giving 403(b) a Bad Name
I was speaking recently to a 401(k) practitioner who does not work with 403(b) plans. When I explained that my primary practice was 403(b), he responded: “Why do you work with those terrible high-fee annuity plans?” I had to explain to him that the segment of 403(b) to which he was referring, the public K-12 segment, does not represent all 403(b) plans. In fact, the plans with which I work - mostly higher education, healthcare, and other large nonprofit plan sponsors - have fees that are as low or lower than their 401(k) counterparts! The gentleman thanked me for enlightening him, but the reality is that there are many people like him who firmly believe that 403(b)s are terrible. Thus, a relatively small portion of the 403(b) marketplace gives all 403(b)s a bad name! And that’s a shame, since many 403(b) plan sponsors work extremely hard to provide competitive benefits to their employees.
But, make no mistake - with the exception of a few good actors primarily in larger school districts, the public K-12 403(b) market is a mess; the polar opposite from the rest of 403(b)s. High fees, too many recordkeepers, and far too many investments are the norm for these plans. It is so bad that there is an entire watchdog website, 403(b)Wise, dedicated to documenting the chaos and warning unsuspecting teachers.
How do the plan sponsors of these plans allow this to continue? Unlike the 403(b) plan sponsors with whom I work, who often have entire committees and ample staff dedicated to ensuring that their 403(b) plans are competitive, the school districts are generally small and have no staff allocated to providing proper oversight to their 403(b) or any other voluntary benefits. For the most part, these 403(b) plans are voluntary and supplemental to a state retirement system that is in place, so they are quite low on the totem pole in terms of allocated resources.
So, how can these 403(b) K-12 plans improve so that they don’t give a bad name to the rest of the 403(b) world? That is a good question! And one that teacher advocates have been attempting to address for many decades, without success. In fact, while most 403(b) plans have changed dramatically in the 27+ years that I have been working with them, many public K-12 plans have remained virtually unchanged!
However, despite the inertia, I do believe that there is a glimmer of hope on the horizon. States have become a lot more involved with retirement savings lately, as evidenced by the tremendous growth in auto-IRA plans for private sector employees not covered by a traditional retirement plan. Could some of this state-level enthusiasm for retirement carry over to an effort to clean up the public K-12 403(b) marketplace? It is a little known fact that states can - and do - sponsor 403(b) plans for public K-12 employees. Some, like the one sponsored by the State of Delaware, provide fees and investments that rival higher education and healthcare 403(b) counterparts, due to collective purchasing power. Whether these can catch fire like auto-IRA arrangements remains to be seen, but the solution to the Wild West of 403(b) plans for public K-12 is indeed already out there for eligible school districts lucky enough to be located in states like Delaware and others that sponsor competitive 403(b) plans.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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