With the recent focus on retirement plan litigation, plan sponsors tend to immediately zero in on fee levels and available investment options when selecting a new plan vendor. These criteria are critical to offering a competitive plan, but plan sponsors should consider a few other factors first.
Higher education and other 403(b) plans were typically established with a different goal than 401(k) plans. Therefore, 403(b) plan sponsors may want to step back and reevaluate why they’re offering a retirement plan, what are the goals for the plan, what are the different recordkeeping structures available, and how this all aligns with their institution’s goals. A traditional vendor vetting process would then follow with a special emphasis on the features and services that can most make a difference in their specific situation.
Sustainable Monthly Income or a Lump Sum
What is the purpose of a retirement plan? The answer may seem obvious; its purpose is to help prepare employees for retirement. However, a retirement plan may have two different objectives: asset accumulation or income sustainability. If not carefully considered, these objectives may conflict with each other.
An asset accumulation approach focuses on building as big a savings account as possible. This is typically the approach taken by 401(k) plans, which were originally created as supplemental plans to defined benefit plans. On the other hand, section 403(b) plans were established as primary retirement plans and were meant to provide secure income streams in retirement. Understanding the actual role of the retirement plan—supplemental or primary—is an important factor that is often overlooked.
It’s worth noting that individuals are increasingly looking for a sustainable income stream in retirement. A recent TIAA survey found that if given a choice at retirement, a majority of non-retired Americans prefer a monthly income stream for life over a lump-sum payment.1
Asset accumulation is a key metric, but the primary objective of a retirement plan should be to turn accumulated savings into lifelong income in retirement. Understanding the plan’s primary objective is important for plan sponsors to effectively align the plan and participant interactions with that goal. For higher education plans, that means offering retirement income options that allow employees to create sustainable income streams in retirement. But, it also means making sure a plan offers education, advice services and resources that can empower employees to take action based on their particular situation.
Recordkeeping Model Matters
It wasn’t too long ago that legislation governing 403(b) plans made it standard for plan sponsors to offer individual provider programs to gain access to a diverse group of asset managers. But, this all changed with the passage of the 2006 Pension Protection Act (PPA) which created a new open architecture standard that didn’t require a multiple vendor environment.
The PPA and subsequent IRS regulations were designed to align the administration of 403(b) plans more closely with 401(k) plans. The result was to bring many of the operational best practices from the for-profit market to the not-for-profit market, while still maintaining 403(b) plans’ focus on retirement income security.
Today, not-for-profit plan sponsors can choose between three recordkeeping models:
- Multi-vendor: Multiple vendors administer their own offering.
- Lead “Master” Vendor: One vendor coordinates the administration of multiple vendors.
- Sole vendor: One vendor handles the entire relationship.
Generally speaking, there are many benefits to moving from a multi-vendor to a sole vendor model. It can help reduce administrative complexity, improve fiduciary oversight, provide for more consistent education and advice services and simplify a plan sponsor’s role by offering one point of contact, among other advantages.
The industry trend is to move towards fewer vendors, but plan sponsors should consider what’s best for their particular situation. Some states may require multiple vendor arrangements, a sole vendor arrangement could limit investment options and implementing a consolidated recordkeeping model can require a significant time and resource commitment from institutions.
Vendor Selection Criteria
With a clear retirement plan objective and optimal plan recordkeeping model in mind, the next step is to evaluate more traditional vendor components. That would include starting with an organization’s background and experience working with not-for-profit institutions.
Although 403(b) plans have embraced many 401(k) best practices, there are still notable differences between not-for-profit and for-profit organizations. The reality is that some vendors aren’t familiar with the unique challenges facing not-for-profit institutions. For example, higher education institutions are grappling with faculty delaying retirement (commonly referred to as “reluctant retirees”), complex investment menus sometimes offering more than a hundred options and understanding if they are subject to ERISA fiduciary requirements.
Some Other Key Factors To Focus On Include:
Fees: The benchmarking of administrative fees can be difficult and complex. Most notably, this is because fees come in all shapes and sizes depending on the services requested or required by the plan, making it difficult to conduct an “apples to apples” comparison of fees. As the Department of Labor indicates, the goal is to ensure fee levels are reasonable, not necessarily the lowest—a common misconception. How a product or service contributes to a plan’s goal may justify a higher fee level. What’s important is tying fees to the value of services and the outcomes that are ultimately delivered to the plan sponsor and participants.
Fiduciary support: With 403(b) plans sharing many of the same compliance and fiduciary requirements as 401(k) plans, working with a vendor that can help a plan sponsor meet its fiduciary responsibilities is critical. A big part of that includes understanding the distinction between non-ERISA and ERISA plans.
Investment options: When designing an investment menu, it’s important to offer best-in-class investment solutions that can help employees get to and through retirement. A few elements to consider offering when building an investment menu include:
- a foundational default option,
- diverse investment options that allow for customization and choice,
- retirement income solutions that can provide sustainable income, and
- a self-directed brokerage option for employees seeking more choice.
Participant communications, education and advice: A comprehensive offering that helps employees make informed retirement planning decisions is necessary to put them on track to meet their goals. All employees can benefit from professional financial advice regardless of the size of their account balances. A good rule of thumb is to consider a vendor that can enhance the overall participant experience through state-of-the-art technology and personalized communications.
Many vendor capabilities have become commoditized, but there still remain some important areas for differentiation. A vendor’s employee engagement capabilities, consultative approach to addressing plan goals, and commitment to helping employees pursue a sustainable income stream throughout retirement are three key areas to focus on.
With so many variables to consider, it can be difficult for plan sponsors to focus on and prioritize the factors that differentiate vendors. An experienced plan consultant can help higher education plan sponsors navigate this process and select a vendor that can best help their employees pursue retirement income security. When identifying your plan consultant, make sure the consultant shares the same goals and objectives that you as the plan sponsor have determined for your retirement program. This will assist in making sure that all parties are aligned with their goals and objectives.
This material is for informational or educational purposes only and does not constitute a recommendation or investment advice in connection with a distribution, transfer or rollover, a purchase or sale of securities or other investment property, or the management of securities or other investments, including the development of an investment strategy or retention of an investment manager or advisor. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made in consultation with an investor’s personal advisor based on the investor’s own objectives and circumstances.
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