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Why is K-12 403(b) Plan Design Stuck in the 90's?

When I started working on 403(b) plans nearly 25 years ago, most were, to put it kindly, a mess. First of all, many of them were elective deferral-only plans (defined benefit plans were more prevalent than they are today), and thus considered to be an afterthought to the main pension plan.

Secondly, even if the 403(b) served as the main retirement plan, single-recordkeeper plans were a rarity in most markets. Private higher education plans were a notable exception, but even there many had added a vendor or two to provide “investment choice”.  

However, in the 90’s things began to change. Recordkeepers could offer non-proprietary funds on their platforms (so-called “open” architecture). One no longer needed to utilize Vanguard, for example, as a recordkeeper to have access to Vanguard funds. Gradually, private tax-exempts such as hospitals, museums, and social welfare organizations, began using a single recordkeeper. Even private higher education organizations, which had previously expanded the number of recordkeepers offered, reversed that trend in the first decade of the 20th century.

Public higher ed entities have been a little slower to change, primarily since they are not subject to ERISA, the provisions of which are difficult to administer in a multiple-recordkeeper environment. However, with the advent of the final 403(b) regulations, public colleges and universities have also seen a significant shift to single-recordkeeper platforms for their 403(b) and other defined contribution retirement plans in the last 5 years or so.

However, all of this may come as surprise to you if you are a teacher, or work with teachers, since in the world of K-12 (and, K-14 in some areas) there are often too many 403(b) providers to count, and a single recordkeeper platform is a rarity. Did the marketplace evolution that changed most of the rest of the 403(b) marketplace for the better simply bypass 403(b) plans for educators?

The answer can be found by taking a closer look at the K-12 market. There are several factors that are NOT conducive to change in K-12, which is why 403(b) plans have largely stayed the same as they were 25 years ago:

  1. Unlike the rest of the 403(b) plan marketplace, there are generally no dedicated HR departments in school districts. Want to change your 403(b) plan? Well, more than likely you have to go to the superintendant or the school board, who likely have so much on their plate that the 403(b) plan is not even a blip on their radar.
  2. Unions, where present, normally function as a change agent, but in K-12 can often be a barrier to 403(b) plan change. The reason for this is that many teacher unions rely on funding from recordkeepers that thrive in a multiple-recordkeeper system, and thus are interested in maintaining the status quo. In fact, it is not unusual for a teachers union to work with a recordkeeper to endorse a 403(b) product from that particular recordkeeper.
  3. Many K-12 403(b) plans are elective deferral-only plans, as most teachers are covered in a state retirement system. Thus, such plans often take a back seat to “more important” benefits such as health insurance in terms of effecting positive change.
  4. Teachers are not immune to the lack of knowledge that plagues retirement plan participants in general. Amazingly, studies still continue to show that the majority of participants believe their retirement plan is “free”, a terrible misperception that in and of itself serves as a barrier to change.  And, with no one looking out for them, such as a union or dedicated HR department, teachers are on their own to obtain the correct information. Sure, there are sites such as 403(b)wise that make it easy for teachers to get to the bottom of their 403(b). However, for most teachers I imagine that tasks such as grading papers and such don’t leave much time to even think about retirement and other benefits, much less be proactive about their 403(b) plan.

Will change come to the 403(b) plans of school districts in the future? There have been promising signs of late, such as some statewide 403(b) plans for school districts electing to utilize a single recordkeeper. However, I believe that only time will tell whether the status quo will remain in K-12 for the next 25 years, as it has for my first 25 years in the business.

Are there other reasons why the K-12 marketplace has remained the same while the rest of the 403(b) marketplace has changed? Let me know as always at

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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