By: Eleanor Laise
May 3, 2010
As Americans struggle to recover from the financial crisis, many teachers, nurses and charity workers are seeing confusing changes in their retirement plans.
Many 403(b)s--tax-deferred plans for employees of certain not-for-profit, educational, governmental and religious organizations--are slashing the number of investment options available to participants and scaling back workers' access to loans and hardship distributions.
The changes stem from new regulations that largely went into effect last year and make 403(b) plans look more like corporate 401(k) plans. That means 403(b) plans, which traditionally have been largely employee-driven, now place much more responsibility on employers to oversee plan investment options, loans and other features. These plans held $711 billion at the end of 2009, according to consulting firm Spectrem Group.
The new rules are causing some immediate headaches for workers and employers. Some workers are frustrated by new layers of red tape and delays in processing loan requests and transactions. And many employers have been forced to hire third-party firms to help comply with the new rules, which can add another layer of fees to the plans. In a survey of employers with 403(b) plans last summer, TIAA-CREF found that 45% acknowledged having difficulty understanding the rules.
While employers' grasp of the rules has improved in recent months, "there's still work to do here," says Bertram Scott, an executive vice president at TIAA-CREF, a major retirement-plan provider.
Still, many believe the rule changes will benefit retirement savers over the long haul. Many 403(b) participants have traditionally been confronted with a bewildering array of investment choices, many charging hefty fees. The new rules are "a huge positive for the employees," says John Kevin, investment officer for the Montgomery County Public Schools in Maryland, which has a roughly $1 billion 403(b) plan. Lower costs and better investment options will result from greater employer scrutiny of the plans, he says.
For many workers, the clearest impact of the new rules is a sharp reduction in the number of investment options.
Previously, workers in many plans were free to invest with virtually any company they liked and move their money around as they saw fit. Now, employers have greater responsibility to monitor investment options and movement of plan assets, and they must share information with each investment provider so they can track such activity. All that becomes cumbersome when hosts of investment options are available.
For instance, while many public schools previously allowed workers to choose among 20 or 30 different firms, now five or seven would be fairly typical, says David Blask, senior pension consultant at Lincoln Investment Planning, an investment firm that specializes in 403(b)s. Ultimately, many employers are likely to go even further, whittling down to just one or two investment providers, some 403(b) experts say.
In some cases, the information-sharing agreement becomes a sticking point that knocks an investment provider out of a plan. Vanguard Group, for example, is not signing certain information-sharing agreements that require it to provide special features like loans or attend on-site benefit fairs, says John Heywood, a principal at the firm.
Other firms are backing away from 403(b)s completely. Janus Capital Group Inc., for example, stopped accepting 403(b) contributions as of the beginning of last year. The new regulations placed additional record-keeping responsibilities on fund firms, and that burden outweighed the benefits of staying in the business, says Janus spokesman James Aber.
Some say there's a silver lining: Since employers are focusing on fewer options, the choices for participants "are among a better, more scrutinized selection of offerings," says Trisha Brambley, president of Resources for Retirement, a retirement-plan advisory firm that helps employers select 403(b) investments.
Access and Contributions
Under the new rules, many workers are likely to find it tougher to access savings in their 403(b) plans. Traditionally, many employers allowed workers to determine for themselves if they met requirements for 403(b) loans or hardship distributions, which are allowed in cases of immediate and heavy financial need. With little oversight, the system led to some abuses.
The new regulations put a greater burden on employers to make sure loans and distributions are taken properly, and in the proper amounts. That means tracking and coordinating loans and distributions across all investment providers. Many employers aren't equipped to do this, and a number have hired third-party administrators, or TPAs. In some cases, loan and hardship-withdrawal features are simply being eliminated.
A number of employers are also eliminating a unique type of 403(b) "catch up" contribution. This feature, which allows some workers with at least 15 years of service to exceed the typical limit on plan contributions, involves complex eligibility requirements and other restrictions. Even where the feature hasn't been eliminated, some workers are finding it too cumbersome to continue their 15-year catch-up contributions. Jeff York, a 45-year-old school maintenance worker in Redding, Calif., says his plan hired a TPA that required him to fill out a lot of paperwork proving his contributions were legitimate. "It was such a complex thing that it wasn't worth the trouble," Mr. York says.
Delays and Red Tape
Indeed, a more complex bureaucracy has emerged in many plans as they struggle to deal with the new regulations. In some cases, the time needed to process participant contributions, loans and other transactions has extended as TPAs begin to monitor movement of money in the plans. Kristi Cook, a Jenkintown, Pa., attorney who works with benefit programs, says she's seeing some loan requests take several weeks, versus four or five days before the new regulations were implemented.
There have also been delays and errors in crediting workers' contributions to their 403(b) accounts. Shortly after the Lampeter-Strasburg School District in Pennsylvania hired a TPA to help it comply with the new regulations, it discovered that some participants' contributions weren't showing up in their accounts, while others were deposited twice, says Terry Sweigart, business manager for the school district. The school district had to terminate its relationship with the TPA and spend several weeks cleaning up the mess, Mr. Sweigart says.
When it comes to fees, the new rules seem to be a mixed bag for employees.
Compared with workers in other types of defined-contribution plans, participants in 403(b)s are more likely to invest in higher-fee products like individual variable annuities or retail mutual funds, according to a recent report from the U.S. Government Accountability Office. One reason: Since employers offering 403(b)s have tended to minimize their involvement in the plans, they have limited opportunities to pool participants' assets and decrease fees, the report said.
The new 403(b) regulations may help reduce plan fees over the long haul. As employers cut the number of investment providers, plans will invest more money with each provider, improving their ability to get lower-fee investments. Since the new rules went into effect, more employers have also joined consortiums to boost their buying power and lower costs, says TIAA-CREF's Mr. Scott.
But complying with the new rules isn't cheap, and in some cases added costs are falling on participants. Many plans that didn't work with TPAs in the past have now hired these firms. While investment providers or employers sometimes absorb this cost, it often comes out of participants' pockets.
Costs may also go up in some plans as they drop low-fee investment options. Tony Antonnicola, 55 years old, a high-school teacher in Harrisonburg, Va., was investing his 403(b) savings in low-cost Vanguard index funds. But amid his plan's overhaul to comply with the new rules, he found that Vanguard was being dropped from the menu. Rather than go with higher-cost options, he stopped contributing to the plan last year. "Teachers are not highly paid individuals, and this just kills," Mr. Antonnicola says.
In a letter sent to the Department of Labor in March, the American Society of Pension Professionals and Actuaries expressed concern that some nonprofit organizations offering 403(b)s might shut down their plans due to added regulatory burdens. Like so much else involved with the new regulations, however, the rules on closing down a plan are tricky. For a plan to be terminated, all assets must be distributed to participants. But in many smaller plans, employers don't have control over those assets, and can't ensure they're distributed.
Ms. Laise is a staff reporter in The Wall Street Journal's New York bureau. She can be reached at email@example.com.