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Guest Joel L Frank

"any Willing Provider" I.e. California Is Nuts!

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Guest Joel L Frank
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Investment management insights and commentary
6 Insights into Higher Education Retirement Plan Opportunities
by Aaron Friedman, National Practice Leader - Tax-Exempt, the Principal Financial Group, Princor Registered Representative on April 4, 2013
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With two daughters in college, I’ve come to appreciate that the three “R’s” continue into higher education. The traditional readin’, ‘rightin’, and ‘rithmatic, carry forward, but I’ve realized lately that a fourth “R” applies. Both my girls are in private colleges, and we’re starting to see an evolution with private higher ed in “R”etirement planning.

What is this evolution, and what do financial professionals need to know?

  1. First, we’re seeing an increase in the percentage of higher ed plans that have a single service provider. According to the Plan Sponsor Council of America (PSCA) 403(b) plan surveys in 2011 and 2012, 43.9% of colleges had single service provider arrangements in 2011, which was up to 48.1% in 2012. That’s the beginning of a trend. We saw the same thing start in healthcare about fifteen years ago, and a significant number of private healthcare plans are now run as single service provider ERISA arrangements.
  2. Why is this happening? For one, administration with multiple service providers is very difficult. With a couple years of final 403(b) regulations behind us, plan sponsors are realizing many of their administrative headaches and compliance concerns come from dealing with multiple providers. See my blog post on this topic for further detail.
  3. Why else is this happening? According to Cerulli, the market is shifting to have greater focus on participant outcomes – what we call “retirement readiness”. We also know that putting together a cohesive education strategy to address retirement readiness with multiple service providers presents an enormous challenge to plan sponsors looking to control consistency of messaging. (See my blog post on education plans). A single service provider enables an effective education strategy.
  4. Public institutions have bigger challenges with consolidating service providers. As it is with private colleges, moving from individual contracts to a single service provider can be a big cultural shift and administrative task. Moreover, ERISA doesn’t apply to public plans, so there is no centralized fiduciary that can direct plan changes.
  5. Participants in plans of higher educational institutions are at the head of the class in terms of their commitment to saving and investing for the future. According to the PSCA surveys, the average account balances of participants in 403(b) plans of colleges is 43% to 46% higher than average account balances in 403(b) plans overall.
  6. Higher educational organizations have not traditionally worked with financial professionals. This is both a challenge and an opportunity. A financial professional can be valuable to the plan sponsor in several ways as they contemplate the change to a single service provider arrangement. The PSCA surveys in 2011 and 2012 showed that 35.5% and 35.1% of higher ed 403(b) plans have never done an RFP. The surveys also show that on average plans at higher ed organizations have more than double the number of investment choices available to participants than average (55 to 62 versus an average of 26 to 28). Many studies have shown that too many options actually hinder effective retirement savings and investment. Financial professionals can help pare down the choices to a responsible number and mix.

Financial professionals have the opportunity now to get in on the ground floor of this emerging trend as higher educational organizations take on more “R”esponsibility for more effective “R”etirement planning. They’re “R”arin’ to go.

Have you had any success in the higher education arena? Let’s chat in the comments.

In addition to blogging here, I also tweet regularly about topics of interest to Tax Exempt plans. Follow me on Twitter: @1aaronfriedman1.

Click here to follow my Tax Exempt blog

 

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"any Willing Provider" I.e. California Is Nuts!

 

Yes! But CTA and the Insurance companies rule the California 403b via insurance code 770.3 at the expense of the 800,000 prek-12 teachers, at the moment.

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Guest Joel L Frank

Hi Steve,

 

Yes, we sure know the reason for this abuse. Have you ever shared with your colleagues the following? https://www.trsnyc.org/trsweb/index.html

 

Even if you eliminate the 7 or 8.25 percent fixed return fund you have a solid 403(b)plan. Each of the funds cost about 40 basis points or $400.00 per $100,000 of value----this includes the expense ratios and administrative costs. The Board of Education of the City of New York has never, never allowed commission based investments to be sold to their employees.

 

Best,

Joel

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