The Impact of Reduced Choice on Participation by School District Employees in 403(b) Plans
PROTECTING PARTICIPATION Debra A. Davis, Esq., LL.M., Dr. Geralyn Miller, Ph.D. & Judy A. Miller, FSA, MSPA
403(b) plans provide an important method to save for retirement for many school district employees. These plans allow workers to make independent decisions as to how much they want withheld from each paycheck and contributed to the plan. Employees are typically permitted to adjust their contribution amounts during the year as necessary. School districts can also make contributions to 403(b) plans on behalf of their workers.
403(b) plans differ from 401(k) plans in that school districts are frequently less involved than private employers are in their 401(k) plans. Individual public schools do not have human resource departments and school districts frequently do not have the resources to develop a “culture of savings” in the same way as the private sector. School-sponsored 403(b) plans typically are not subject to the non-discrimination rules that encourage many private employers to foster savings by lower paid workers. Additionally, participants in 403(b) plans often have their own individual contracts with the investment provider.
Often, a school may only collect contributions and make its auditorium or gymnasium available for advisors to meet with interested employees. Thus, participants bear more responsibility, and often need more help to learn about how the plan works, how much to save for retirement, and how to invest their money in the plan.
This paper examines the impact of participant choice in 403(b) plans. It looks at the extent to which school district employees want choices
in their 403(b) plans and whether providing those choices is beneficial to them.
It finds that many participants want the ability to receive assistance with their retirement plans. For example, a study by the TIAA-CREF Institute showed that 60% of near-retirement higher education employees had consulted with a financial professional about retirement during the previous two years. A study by Merrill Lynch also revealed that 34% of retirees would recommend working with a financial advisor early in life.
Studies showed participants have varied preferences regarding how they want to receive assistance. For example, a survey by Charles Schwab indicated that 51%
of participants preferred one-on-one consultation, while 23% preferred an online tool. A study by ING reflected that 59% of government workers wanted seminars or meetings, while 66% preferred printed materials. Multiple methods for receiving assistance, such as those described in the surveys, are currently available to 403(b) participants through the marketplace.
The paper finds that participant choice is valuable both in terms of helping workers prepare for retirement and maintaining participation levels in 403(b) plans. Studies indicate that workers save more for retirement and have greater diversification when they have the ability to consult with a financial professional. Additionally, researchers at the RAND Corporation found that individuals who voluntarily elect to receive advice have greater positive performance results than both persons who do not receive advice as well as individuals who automatically receive advice.
Data also reflects that participation in 403(b) plans declines when the number of investment providers is reduced. In Southern California, around 50% of workers stopped contributing to their 403(b) plans when their existing investment provider was no longer available. Similarly, the number of participants dropped by over 54% when a school district in Colorado went from 55 investment providers to a single investment provider model for its 403(b) plan. Nearly 40 percent of participants
ceased participating in a 403(b) plan at a school district in Pennsylvania when the plan went from nineteen investment providers to a single investment provider.
Thus, the paper suggests that school districts should avoid reducing the number of investment providers in order to protect the levels of participation in 403(b) plans. School districts that are interested in reducing costs may want to consider options that include using an independent third party administrator (TPA) to administer the plan and providing transparent disclosure of investment fees and other expenses to workers.
For many school district employees, 403(b) plans provide an important means to save for retirement. Participants in these plans can make independent decisions with regard to how much they want withheld from each paycheck and contributed to the plan. Unlike 401(k) plans, there is typically less employer involvement in school-sponsored 403(b) plans. Thus, the onus is on the worker to learn about how the plan works, how much to save for retirement, and how to invest their money in the plan. As a result, school district employees often need to receive more retirement advice for 403(b) plans than participants in 401(k) plans.
This paper evaluates the impact of participant choice in 403(b) plans. It examines the extent to which workers prefer choice in their 403(b) plans and the impact of having choices. The paper finds that school district employees benefit from the option to receive advice, both in terms of their preparation for retirement and participation levels. It further finds that data reflects a decrease in the participation rates for 403(b) plans when the number of investment providers is reduced. As a result, this paper suggests that school districts consider alternatives to reducing the number of investment providers in order to reduce costs. These include using an independent third party administrator (TPA) to administer the plan and providing transparent disclosure of investment fees and other expenses to workers.