On April 4, the U.S. Government Accountability Office (GAO) released a report, “Defined Contribution Plans: 403(b) Investment Options, Fees, and Other Characteristics Varied. The report attempted to quantify what is happening in the $1.1 trillion 403(b) market, about half of which were plans covered by the Employee Retirement Income Security Act (ERISA).
GAO found considerable disparities in pricing in the 403(b) market, both for investment products and recordkeeping. And while large plans and those subject to ERISA have made strides to modernize their vendor structure and bring rationality to the pricing of products and services, even these employers struggle to get their plans to operate more consistently with the 401(k) market.
The modernization of the 403(b) market is less than 20 years old. Most plans whose history is longer than that still carry the legacy of annuity products sold to participants. In most cases, while funded by the plan, these annuity contracts are contractual relationships between the participant and the insurer. As a result of that structure, plan fiduciaries and sponsors lack the contractual privity to require participants to sell these contracts, creating a hurdle to plan modernization.
Sponsors are left trying to educate and incent participants to go through the very manual process of escaping an old annuity contract through a contract exchange. The result of this antiquated process is participants busy teaching, caring for patients, or serving their local community are left being taxed by bad contracts and lower returns.
GAO reported recordkeeping fees ranging as much as 2% of assets and investment fees as high as 2.37%.
The insurers that sold these products aren’t incented to fix their contracts, and the sponsors who have come to fix their retirement benefit packages find their ability to fix these plans severely limited. They are able to implement a new structure for future contributions, but even when that occurs, the plan still carries the higher operational burdens of maintaining the legacy assets.
We can fix the environment under which these plans operate.
- State insurance regulators should require that contracts between participants and insurers funded under retirement plan structures be amended to allow plan fiduciaries to act on behalf of the contract holders.
- The DOL should initiate a rule wherein insurance companies with individual contracts where plan sponsors lack discretion must assume legal responsibility as a fiduciary to those contracts.
If these steps aren’t possible, then it’s time for a reset. The DOL should open an amnesty window where plans with fully funded annuity contracts where the plan sponsor has no contractual privity can be separated from the plan and its financial statement, fee disclosure requirements, etc.
For more than a decade, 403(b) sponsors governed by ERISA have been carrying the burdens of reporting on insurance contracts that they aren’t a party to. Allow these organizations to clean up and modernize and leave it to the state insurance regulators to sort out the contracts on the backend.
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