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How 403(B) Plans Are Wasting Nearly $10 Billion Annually, And Wha

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Great Piece also linked the "Impact of fees" from this site




How 403(b) Plans are Wasting Nearly $10 Billion Annually, and What Can Be Done to Fix It




Executive Summary

403(b) plan sponsors can dramatically reduce participant-borne costs while improving employees’ retirement readiness by:

– Reducing the number of investment options, utilizing an “open architecture” investment menu, and packaging the options within a “tiered” structure.
– Consolidating recordkeepers to improve efficiencies and reduce compliance-related risks.
– Leveraging aggregate plan size and scale to negotiate competitive pricing.

In addition, legislators can assist by:

– Supporting employer-sponsored 403(b) master trusts and prohibiting recordkeepers from issuing individual contracts or custodial agreements in employer-sponsored plans.
– Allowing 403(b) plans to be eligible investors in lower-fee investment vehicles, particularly collective investment trusts (CITs).



Today’s 403(b) plans are showing their age with outdated plan designs imposed by regulations that predate their for-profit employer 401(k) plan peers by roughly 20 years. Most notably, their existing multi-provider recordkeeper platforms, outsized investment menus, and inability to utilize more institutionally focused investment vehicles have created an environment that impairs retirement outcomes for participants.
While it may be difficult to eliminate all of the nearly $10 billion in excessive fees borne by 403(b) plan participants annually, this paper’s recommendations begin to address many of the issues. As a first step, 403(b) plan sponsors could adopt several of the best practices utilized in the for-profit employer sponsored 401(k) market. Seeking clarifying regulatory guidance consistent with for-profit employer regulations to obtain equal access to lower-cost investment vehicles would further result in improved retirement readiness for participants.

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The paper did not shed much light on what to do. Aon Hewitt has little experience with 403b plans with public school districts. Interesting that the paper recommends legislation. We tried twice to reform our state regulations so we could implement a single payer plan for California 403b plans. Guess what, the teacher's union, California Teachers Association that Aon Hewitt now works for I believe, and the insurance industry, blocked our reform effort. The reform bill was so weak compared to the powerful interests behind keeping the status quo and the $ten billion in fees for their coffers, it never had a chance with only two votes out of a committee of about 10 members voting for reform.

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The author compares the fee of the average CIT (collective investment trusts) of 0.53% with the average fee of mutual funds of 0.97%. He claims this 0.44% difference justifies 403b's replacing mutual funds with CIT’s. How about comparing CIT fees with the average fee of broad-based index funds (0.1 to 0.2%)? He wants to replace high fee products with a moderate fee product, when a low fee product already exists. What little regulation the SEC does on mutual funds should be increased, not eliminated.

Advocating for unregulated CIT’s to replace mutual funds in 403b’s is like trying to replace mutual funds with hedge funds into 403b programs. No thanks!
It’s ridiculous the author wants to improve 403b’s and doesn’t mention the insurance industry’s firm grip? It seems to me that his agenda is something other than improving today’s 403b scene.

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I agree with you both. A 403(b) should provide participants access to an index fund for all Morningstar style boxes for equities & fixed income. http://www.morningstar.com/InvGlossary/morningstar_style_box.aspxat a very low cost (.25 or less)


Also if participates want to pay an adviser a fee to manage/advise them on their accounts, it should be set up on a fiduciary basis vs. the current commission/loaded/high fee structure. Omni 403b is the TPA that handles the majority of K-12 teachers in the northeast. Aspire & FTJ funds are preferred providers on that platform and are the right model to follow IMHO. Participants can go direct to both investment providers or compensate an adviser to help them manage their accounts on a negotiated fee structure..Both these providers give investors access to 20,000 fund options (yes way to many but ) I think both have access to 250 Vanguard options as well as many other low cost competitors.


Getting rid of the variable annuity products would be the best start to cleaning up this industry in my option. I'd love to know how much the insurance industry collects each year on Mortality & Expense fee.(Billions) I have rarely seen anyone cash in on this.


But the article is at least a good starting point for discussion.





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