Sweeping federal reforms on 403(b) plans should mean more demand for services from financial advisors, as plan sponsors (primarily K-12 public school districts and small not-for-profit organizations) try to manage the new requirements.
Last month, the Internal Revenue Service (IRS), in conjunction with the Treasury Department, issued new rules for 403(b) plans aimed at tightening up regulation of the vehicles—bringing it more in line with that of 401(k) plans, their younger, more popular, cousins. The reforms were long anticipated, as rules governing 403(b) plans, created in the late 50s, have seen little change since 1964.
Until now, these plans have required very little administration on the part of the employers that sponsor them as well as loose fiduciary standards. “The IRS had concerns around the manner in which loans were being distributed and how these plans were being managed,” says William Jasien, senior vice president at ING, a key player in the 403(b) space. The new rules, set to take effect Jan. 1, 2009, call for an official document outlining the details of each plan, new restrictions on how money can be moved in and out of 403(b) plans and increased fiduciary responsibilities for the plan sponsors or employers.
“There will likely be an aggressive consolidation that occurs” among 403(b) plan providers, adds Jasien, because the new requirements will make it too burdensome for sponsors to have dozens of investment options. “The folks operating on the fringes will not survive,” he says. As for advisors, they will have to adapt to the new landscape.“There will absolutely be a role for a financial advisor in the 403(b) marketplace,” Jasien says. “It will be different. It may be a little tougher. It really depends on where you sit, in terms of what firm you’re out there working with. Where there’s chaos, there’s opportunity.”
The new rules are likely to translate into a win for investors in the form of greater disclosure by employers (in many cases, public school districts and nonprofit hospitals) about their 403(b) plans, and lower-cost investment options in those plans. Employers will also be required to ramp up their oversight of the plans and get more involved in promoting participation. A potential down side to the new regs, however, is that workers will have less choice when it comes to investment options. But an April report from research firm Cerulli & Associates argued that too many choices leads to “inertia” among plan participants.
Advisors will not be without challenges in the new landscape. One of the new wrinkles to 403(b) plans will limit plan participants’ options when transferring money. “Under the new regulations, you will only have the latitude to move among the carriers that are part of that plan,” Jasien says. “The ability to transfer those dollars once you have an accumulated account is where it will have its greatest impact on the registered rep community. They will only be able to transfer them to the providers that are active.” Essentially, if a participant wants to transfer funds out of the plan, he can only do so on an intra-plan basis.
Assets held in 403(b) plans stood at $696 billion at the end of 2006 and are expected to climb to the $1 trillion mark by 2011, according to Cerulli. TIAA-CREF is the 800-lb gorilla in the space with more than half of industry assets, but it should see more competition from the big insurance companies like AIG and ING as well as Fidelity Investments, which already dominates the 401(k) marketplace.
The 403(b) plans will still be dwarfed by their sexier 401(k) counterparts, where assets reached $2.7 trillion at end of last year. Part of the reason 403(b)s are less popular is that there is rarely a company match on contributions and roughly 70 percent of the offerings are annuities.