By Edward “Ed” V. O’Neal, Vice President and Manager, Retirement Plans

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Retirement plans for nonprofit and tax-exempt entities are often structured very differently than the retirement plans of for-profit businesses (like 401k plans). This often results in some unique challenges for both the plan sponsor and participants.  This is particularly evident with 403b plans (also known as Tax Sheltered Annuities) for educational entities, such as private K-12 schools, colleges/universities and public schools.  With proper planning, these entities can modernize their retirement plans, improve plan sponsor compliance and simplify plan participant investment selections.

Following the model of many nonprofit organizations, educational entities have typically designed their 403b plans to offer participants access to mutual fund and annuity options from a variety of providers (often more than 25 options *) and serviced through multiple financial professionals and representatives.   Typically, the selection of which mutual fund and annuity options to offer to plan participants are often random, with little consultation between the educational entity and an investment professional regarding the creation and review of a comprehensive investment menu.

Many educational entities now recognize that monitoring compliance across multiple investment options and service providers, such as coordinating loans and monitoring distributions, can be difficult and can risk violations of the Internal Revenue Service (IRS) code.  Additionally, studies (like one conducted by Columbia University **) have shown that too many investment options can have a detrimental effect on participation and overall savings rates.

These issues have caused an increasing number of educational entities to rethink and modernize the structure of their 403b plans to more closely mirror 401(k) plans.  As a result, more of these entities are:

  • trending away from 403b plans with multiple providers (and an excessive number of investment options) and opting to significantly reduce the number of providers or choose a single provider.
  • increasingly adopting 401k best practices, such as the creation of a Plan Investment Policy Statement to provide a due diligence process for selecting and monitoring the investments available in the 403b plan.
  • starting to work more with financial professionals who assist in analyzing existing investment options, creating an investment menu tailored to the needs of the educational entity and establishing a process for monitoring the investment menu.

Before implementing any changes to your retirement plan, remember to consult with your tax/legal advisor and investment/financial advisor.

Benjamin F. Edwards & Co. does not provide legal or tax advice. Specific questions on taxes or legal matters as they relate to your individual situations should be directed to your tax or legal professional.

*2018 Plan Sponsor Council of America (PSCA) 403b Survey

**Iyenger, Jiang, Huberman ‘How Much Is Too Much?’ Columbia Business School, 2003