December 2020

A white paper by Edward Kenney and Tali Yarmush, Equitable Research partner:

Zeldis Research Associates

White paper

Having a choice positively affects participant behaviors

Benefits of multiple 403(b)

providers

Executive summaryThe study found provider choice leads to higher 403(b) participation, greater familiarity and deeper engagement with one’s plan.

Further, having a choice of providers was associated with higher annual contributions, higher account balances and more positive attitudes toward their 403(b) plan overall. These differences were augmented even more by the presence of a financial professional within a multiple-provider district. The paper concludes with a section on best practices in managing a multiple-provider plan, designed to help plan sponsors understand the importance of several considerations when working with multiple providers.

This paper demonstrates the benefit of K-12 school districts offering a choice of multiple 403(b) providers to plan participants. It includes a literature review of similar, relevant subject matter, as well as the results from independent, proprietary research sponsored by Equitable.

To better understand and measure the impact of provider choice for educators who voluntarily contribute to a 403(b) retirement plan, Equitable Financial commissioned an online survey among 819 U.S. K-12 educators in multi- and single-provider districts. The sample was a representative cross-section of the U.S. educator population (see Methodology section for further detail).

Equitable would like to thank Ellie Lowder, TGPC, of TSA Training & Consulting Services and co-author of "The Source for 403(b) and 457 Plans," for her expert advice. Her input was invaluable for the completion of this paper.

Key findings1 2 3 4Provider choice leads to increased 403(b) participation, due to greater familiarity and higher engagement with participant’s plan.

Better financial outcomes, such as higher annual contributions and higher median account balances, are linked to provider choice.

The presence of a 403(b) financial professional combined with provider choice results in even greater financial outcomes.

Industry best practices may improve processes for seamlessly managing multiple-provider 403(b) plans.

Introduction

Voluntary employer-sponsored retirement plans, such as a 403(b), are progressively becoming more important to teachers’ retirement planning.

With increasing uncertainty about the ability of pensions to fully cover retirement expenses, 403(b) plans are becoming an even more important and attractive option to assist educators with retirement planning. This is especially the case due to state pension funding gaps and reductions in benefits being made to state retirement plan systems, according to research from the National Tax-Deferred Savings Association (NTSA).1 As teachers become more reliant on employer-sponsored 403(b) retirement plans, plan participation becomes more important — and districts where a choice of multiple providers is offered tends to lead to greater 403(b) participation.

1 National Tax-Deferred Savings Association. “Improving Retirement Savings For America’s Public Educators.” In press as of November 2018.

Provider choice 1

The impact of provider choice

Provider choice is associated with greater 403(b) participationIn a research review published by the ASPPA Pension Education and Research Foundation, three state-level case studies (in California, Colorado and Pennsylvania,2 as well as an additional case study in Iowa3) demonstrate the negative impacts of provider deselection on plan participation in public schools.

In California:The number of investment providers was reduced, leading to a 56% reduction in plan participation among participants whose provider was no longer available.

In Colorado:A 54% reduction in participation was found over a 5-year period, when available plan providers was reduced from 55 to a single vendor.

In Pennsylvania:Nearly 40% of educators ceased contributing to their plan when multiple options were condensed to a single vendor.

In Iowa: Iowa similarly passed legislation limiting the number of providers offered in the state’s K-12 public schools in an attempt to minimize fees to participants (among other perceived benefits).3 The new rules took away the right of choice for older,4 more experienced teachers, as the limited number of providers reduced their investment options. Iowa’s cost-oriented approach resulted in a decrease in participation by as much as 50% in some counties,5 and limited financial professionals’ abilities to service existing participants and engage with prospects.

2 ASPPA Pension Education and Research Foundation. “Protecting Participation: The Impact of Reduced Choice on Participation by School District Employees in 403(b) Plans.” 2011.3 “State of Iowa Retirement Investors’ Club (RIC) - 2009 Plan Changes.” http://dx1slceezt1vd.cloudfront.net/attachments/3c4638536ef11cecbf6310ae15a884f56d0b3a7e/store/11dab899ba309e6a38a86f652017486ec3cb51b8f9e970b006f9e04e218b/Plan+Changes+Presentation.pdf.4 Offner, Jim. “Changes in Teacher 403(b) Plans Create Angst Among Financial Planners.” WCFCourier (September 2008). https://wcfcourier.com/business/local/changes-in-teacher-b-plans-create-angst-among-financial-planners/article_d1b414cb-145d-590c-a265-affdaf0556a0.html.5 American Retirement Association. “Less Choice Leads to Lower 403(b) Participation” (November 2018). https://www.usaretirement.org/less-choice-leads-lower-403b-participation.

2 Provider choice

6 Clark, Robert L., et al. “Supplemental Plan Offerings and Retirement Saving Choices: An Analysis of North Carolina School Districts.” Journal of Pension Economics & Finance 15.3 (2016): 333-355.

*Represents proportion of responses.

In the other direction, it asserts that increasing provider choice within districts is associated with a greater plan participation rate, as demonstrated by the NTSA’s research.

In the chart below, the average participation rate increases from 25% for one vendor to 33% for 15 or more choices.

To help explore this link, Equitable sponsored research on multiple versus single 403(b) provider choice.

This research finds having a choice of providers leads to participants’ greater familiarity with the plan, deeper engagement, higher plan satisfaction and more confidence in the plan.

Number of vendors

25% 26%28%

30%

33%

Why does this happen? While a true causal link remains unclear, Clark et al. finds participation rates may be due to the increase in marketing activity associated with multiple vendors.6 Higher marketing levels could drive greater awareness of provider choice, leading to greater plan participation rates overall — even if educators did not enroll with the providers doing the marketing.

Average participation rate

1 2-4 5-10 11-14 15 or more

Impact of provider choice on attitudes

Familiarity with 403(b) plan

Plan satisfaction

With provider choice Without provider choice

Confidence in retirement plan

Keep an eye on account performance*

66%

87%

69%

70%

57%

50%

80%

61%

Provider choice 3

Benefits of choice within a school district

There are multiple financial benefits to provider choice within a school district

Additional benefits of offering a choice of providers within a school district include increased annual contributions to 403(b) accounts and higher account balances. Indeed, in their white paper, the NTSA finds a 203% increase in average contribution rates among plans providing access to 15 or more plan providers, compared to those plans offering only one plan provider. Further, they find participants with greater choice of plan providers also have higher account balances.

$0

$10,000

$20,000

$30,000

$40,000

$50,000

Number of vendors

Average account balance by number of providers

1 2-4 5-10 11-14 15 or more

$40,000with provider choice

$30,000without provider choice

Median account balance

Equitable’s proprietary research further supports these findings, by showing that having a choice of plan providers within one’s 403(b) plan leads to higher annual contributions, higher account balances and more positive outcomes.

Annual contributions to 403(b) $4,843

with provider choice

$3,961without provider choice

With provider choice Without provider choice

Positive outcomes associated with provider choice

61%

34%

61%

Confidence in investment choices

43%

Satisfaction with plan performance

Knowledge about investment choices

21%

48%

4 Provider choice

7 “The Value of the Advisor.” Released December 2018. *This data is significant at the 90% confidence level only.

$40,000

$35,500with provider choice

without provider choice

Median account balance with a financial professional*

Additional advantages

There are additional advantages to working with a financial professional within multiple- provider school districts

Equitable’s white paper, “The Value of the Advisor” demonstrated how the presence of a financial professional works synergistically with 403(b) provider choice.7 We find those with a choice of providers are significantly more satisfied with their financial professional than those without a choice. This may be because financial professionals working within multiple-provider districts are driving greater outcomes.

With provider choice Without provider choice

Satisfaction with a financial professional

Positive attitudes associated with a financial professional within multiple-provider districts

69%

64%

66%

36%

Confidence in investment choices

With a financial professional Without a financial professional

Advisor mitigates risk

55%

55%

Satisfaction with plan performance

51%

Knowledge in investment choices

30%

When provider choice is paired with the presence of a financial professional, more effective financial behaviors and greater positive attitudes take place, leading to ultimately higher satisfaction with plan performance.

74% 59%

Provider choice 5

Best practices

Leverage industry best practices to seamlessly manage multiple-provider 403(b) plans

The research reviewed thus far has demonstrated the positive impacts of having provider choice within K-12 districts — namely, increases in plan participation, greater financial and attitudinal outcomes, and increased advantages when working with a financial professional. Moving forward, we plan to highlight a few industry best practices for plan sponsors in managing multiple-provider plans within a school district, assuming a district intends to pursue (or maintain) this arrangement.

While it may seem logical to think that more providers equals more paperwork, potentially higher fees and other challenges, there is a clear path toward minimizing potential pain points and minimizing risks through a multiple provider arrangement.

A few of these best practices include:

• Consider the challenges inherent in moving to a single provider.

• Leverage the value-added services offered by a third-party administrator (TPA).

• Maintain a single plan document when working with multiple plan providers.

• Partner with other providers on retirement education advocacy to ensure the appropriate products and providers are available to teachers.

Consider the challenges of moving to a single providerDespite our evidence to the contrary, some school districts may be inclined to consider a single- provider arrangement.

However, doing so may lead to unexpected administrative, compliance-related and fiduciary challenges (which may also exist within multiple- provider districts), such as:

Tracking legacy accountsThese accounts are still part of the participants’ plan, and compliance activities still need to take place. However, legacy providers may not be as responsive as they once were. As such, districts or providers are obligated to track these legacy accounts.

Tracking hardships and loansAfter the IRS changed regulations on January 1, 2009, this has been made even more challenging. After this date, school districts were held responsible for following the rules with respect to hardships and loans within accounts. This may result in the district or single provider assuming the responsibility of tracking participants’ hardships and loans from various providers.

Potential for fiduciary exposureThis varies as a function of state, school and/or board policy. At the present time, there are no federally established guidelines for non-ERISA plans as it relates to employer fiduciary obligations.

6 Provider choice

According to the Association of School Business Officials (ASBO),8 the school or its board may be assuming additional fiduciary duties if board policy stipulates that:

• The board will review the annual costs, performance and quality of investments from their providers on an annual basis.

• Any provider that does not meet certain minimum investment criteria will be deselected the following plan year.

Activities such as these could significantly increase the risk of making the plan sponsor a fiduciary for the plan.

Leverage the value-added services of a TPAA third-party administrator (TPA) provides value-added support to 403(b) plan sponsors in multiple ways, including compliance support, recordkeeping and communications.9

With respect to compliance support, there is a growing need and demand for this, as employers are being held responsible for transactions that take place under their 403(b) plan(s). The TPA provides overall compliance at the plan level with respect to the following:

• Tracking and monitoring contributions.• Reviewing eligibility for catch-up contributions.• Following the ordering rule on catch-up contributions.• Monitoring and authorizing contract exchanges.• Reviewing plan-to-plan transfers from one employer

to another employer.• Reviewing transfers between approved providers

within the plan.• Administering loans/hardship withdrawals. • Tracking suspension periods and reinstatement.

• Reviewing qualified domestic relations orders, administering distributions and monitoring required minimum distributions.

With respect to recordkeeping, a TPA also provides crucial assistance. Specifically, they keep records of account information and transactions that occur; they maintain an accounting of the value attributable to each 403(b) plan participant; and some TPAs even keep track of the sources of money held within accounts (e.g., Roth contributions, employee deferrals and employer contributions). Regarding elective deferrals, a 403(b) plan must meet the requirements of the “universal availability” rule. Under this rule, if any employee of the employer maintaining the 403(b) may participate, then all of the employer’s employees must be given the opportunity to participate.10

Finally, with respect to communications, even where provider choice is offered, TPAs are closely aligned with plan providers, delivering employee education and promoting the 403(b) plan. More specifically, they are responsible for the plan’s educational and training materials, as well as enrollment procedures.

Maintain a single plan documentRegardless of whether a district partners with a TPA, when working with single or multiple providers, a plan must meet the “written program” requirements of the final 403(b) regulations. In addition to the maintenance of a written plan, the 403(b) regulations require that the operation of the program be in accordance with the terms of the written plan. While the IRS does not require the written program to be a single document,11 the maintenance of a single-plan document is an industry-recommended best practice.

The plan document is a foundational element in the establishment and ongoing operation of a 403(b) plan, and contains the plan’s terms, rules and features facilitating the ongoing compliance necessary to retain tax-advantaged status.

8 Association of School Business Officials International. “Fiduciary Issues and the Final 403(b) Regulations.” (2016). http://asbointl.org/asbo/media/documents/Resources/ERISA-Fiduciary-Q-A.pdf.

9 Lowder, E., & Diehl, S.D. “The Source for 403(b) and 457(b) Plans.” American Retirement Association and NTSA (2018).

10 irs.gov/retirement-plans/403b-universal-availability-requirement.

11 irs.gov/retirement-plans/irc-403b-tax-sheltered-annuity-plans-written-program.

Provider choice 7

Best practices (continued)

The plan document helps organize the terms and conditions related to the operation and administration of each provider under the plan, specifically:

• Each provider’s rules and features for loans and hardship withdrawals.

• Internal processes unique to each provider.

To enable participants to receive tax-deferred benefits, the plan document must contain required provisions under Code Section 403(b) and the regulations, as well as optional provisions elected by the plan sponsor. Regardless of the number of providers offered under a plan, it is most beneficial to have all plan terms and conditions outlined in a single document for easy reference, as well as ongoing compliance.

Partner with providers on retirement education advocacyEducation about plan options and benefits is integral to planning for a comfortable retirement, and it is in the best interest of participants to understand all their options and available products. In the cases where a choice of providers is offered, it is beneficial to districts and participants for providers to adopt a uniform and product-neutral retirement education program for the teachers in those districts.

Along those lines, the NTSA has created a comprehensive retirement educational program available to school districts and their employees. This vendor-neutral program provides attendees with a greater awareness of what they will need to save to supplement their pension and Social Security. Additionally, the NTSA Certified Retirement Education Specialist (CRES) advisor is qualified by the American Retirement Association (ARA) Retirement Plan Academy and available to teach the Retirement Education program to school districts.12

Districts utilizing the NTSA’s educational program and/ or a CRES advisor may experience enhanced plan

participation in the future, as a result of this program. This is consistent with the pattern of research findings shown earlier among those working with a financial professional in a multiple-provider district. (See page 5).

Partnering with other 403(b) providers will also promote transparency and advocacy. This may help providers in the same district to structure their approach to meet a consistent level of provider-neutral retirement education for participants.

ConclusionThe research results shared in this paper complement and expand upon a growing library of findings suggesting positive relationships between provider choice and increased participation in, and engagement with, 403(b) plans.

Especially when following the best practices outlined here for plan sponsors, the research shows the benefits of a multiple-provider approach outweigh any potential challenges. Ultimately, this review and associated research results aspire to enhance the relationships between service providers and K-12 school districts by showing how providing a choice of 403(b) provider options leads to not only greater financial outcomes, but also enhanced confidence among educators in meeting their retirement goals.

This paper further demonstrates that

having a choice of providers is linked to

greater attitudinal and financial

outcomes among plan participants.

The benefit of provider choice is

augmented even more when participants

work with a financial professional.

12 ntsa-cres.org.

8 Provider choice

MethodologyThis report presents results of a study conducted by Zeldis Research, commissioned by Equitable, to K-12 403(b) plan participants.

Steps were taken to ensure the sample of K-12 403(b) plan participants was nationally representative by age, region and gender. Respondents included K-12 educators who participated in their 403(b) plan (a mix of those in single- and multiple-provider districts), as well as plan prospects.

A total of 819 respondents completed the online survey in 2018. This paper is based on a follow-up deep-dive analysis in 2020.

The margin of error at the 95% confidence interval is +/- 3%. All differences between groups shown in this report are statistically significant at the 95% confidence interval.

Only 12% of the plan participants surveyed are Equitable plan holders. Other plan providers represented in the respondent base include Fidelity, VALIC, Voya, MetLife, Lincoln, Horace Mann and TIAA-CREF.

Provider choice 7

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