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

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Retirement plans for nonprofit and tax-exempt entities (particularly 403b plans) are often structured very differently than retirement plans for business owners—and can also have unique challenges. One such challenge is the broad number of investment choices offered to plan participants (often more than 30) and typically among multiple investment providers/platforms/recordkeepers. Although this broad investment and multi-provider structure has been customary for many nonprofit 403(b) plans, new studies have revealed that this approach could be limiting plan efficiencies in several areas:

  • Too many investment choices can lead to confusion about the investment choices available to plan participants.
  • Nonprofit entities may not be unable to leverage plan assets in negotiating competitive pricing from providers/platforms/recordkeepers.

A recent report by industry research group AON Hewitt[1] indicates that some of these inefficiencies could be costing the nonprofit retirement plan industry (and 403b plans particularly) nearly $10 billion annually.

One potential solution is to avoid “choice overload” with the investment options for the retirement plan.  Too many choices can lead to plan participants feeling overwhelmed and research has shown it also may not lead to participants building better investment portfolios. Instead, reducing the number of options, while ensuring investment choices are allocated among several asset classes to meet diverse investment needs can create a more streamlined retirement plan and better experience for plan participants. Streamlining the investment options also makes it easier for nonprofit groups to monitor investment options to ensure they continue to meet the overall goals and objectives of the retirement plan.

In addition, consolidating the number of recordkeepers offered in the retirement plan can lower administrative cost, improve regulatory compliance and provide a more effective plan governance structure.

Certainly, recommending changes to a long-standing retirement plan structures and policies can be challenging, but we’ve seen many nonprofit groups gradually introduce key changes to their retirement plans to ease tensions.

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

[1] AON Hewitt (January 2016 ). How 403(b) Plans are Wasting Nearly $10 Billion Annually, and What Can Be Done to Fix It.

July 12, 2017 |