The IRS plans to issue final regulations for 403(b) plans by the end of June, and the changes could result in industry consolidation, particularly in the K-12 marketplace, observers said.
CHICAGO — The IRS plans to issue final regulations for 403(b) plans by the end of June, and the changes could result in industry consolidation, particularly in the K-12 marketplace, observers said.
As a result, smaller advisers and providers may exit the business, while major players may have to work harder to win the 403(b) business and to retain accounts, industry observers said.
The regulations represent the first significant change in 403(b) plans in 40 years, and they are meant to make the antiquated plans more like 401(k) plans.
The proposed changes would, for the first time, require 403(b) plans to have written guidelines, which would be the responsibility of the employer, but advisers would have to answer employers’ questions and address their concerns about compliance.
The savings plans are commonly used in non-profit organizations, school districts and hospitals as a retirement vehicle for their employees.
Companies that specialize in the 403(b) marketplace, such as Houston-based AIG VALIC, a subsidiary of American International Group Inc. of New York, ING U.S. Financial Services in Atlanta and New York-based TIAA-CREF, have already prepared documents to make it easier for employers to comply with the regulations.
Officials at these firms say that it is important that advisers align themselves with providers who have already set up these procedures.
Data from The Spectrem Group Inc. of Chicago showed that there was $652 billion in investments in 403(b) plans as of Dec. 31, compared with $548 billion at the end of 2003.
The biggest chunk of those assets was in higher education, with 44% of the assets, or $287 billion. Public K-12 plans followed, with 26% of investments, or $168 billion.
The effective date of the final regulations is Jan. 1.
‘Time to execute’
A big difference between 401(k) plans and 403(b) plans is that companies with the former plans choose one provider and typically work with one adviser, while in the 403(b) marketplace, it isn’t uncommon for school districts to have dozens of providers that offer products to employees.
Some employers, particularly in the K-12 market, have had as many as 70 providers, said William S. Jasien, senior vice president of education market distribution for ING. The firm’s total education assets in 403(b) plans were about $20 billion as of Dec. 31.
“In my view, it’s time to execute on these regs and move forward or not,” he said.
The likely new requirement calling for written 403(b) plan documents will force employers to choose to work with just a few providers rather than 20 or 30 providers, industry insiders said. In some cases, school districts have already begun consolidating and reducing the number of vendors with which they work, experts said.
Plan sponsors are nervous about the changes, said John Brosnahan, a registered representative with ING Financial Advisors LLC of Hartford, Conn. He has stayed in close contact with all his plan sponsors.
“The approach I’ve been taking is to keep revisiting with plan sponsors,” he said. “You want to add value to plan sponsors.”
Mr. Brosnahan works with K-12 school districts, all of which have more than one provider who works with them.
TIAA-CREF spokesman Chad Peterson said he is in “wait-and-see mode.”
But Elaine Immerman, associate general counsel for TIAA-CREF, said that because the company works mostly with higher-education plans, she doesn’t expect major changes.
Largest provider
TIAA-CREF is the largest 403(b) provider in the nation. It had $406 billion in assets under management as of Dec. 31, with the majority of those in 403(b) plans.
Advisers who are focused on this market will do better than those who are dabbling in it, said Bruce Corcoran, vice president of K-12 national market for AIG VALIC. The company has more than $40 billion in 403(b) assets under management.
There is no question that these regulations will be a challenge, said Ed Forst, president and chief executive of Philadelphia-based Lincoln Investment Planning Inc.
“You have to fight harder to keep the contracts you have, and you have to fight harder to get the contracts,” he said.
The advisers who will do well are those aligned with a broker-dealer or a provider that specializes in this industry, Mr. Forst said.
His company has about $6.5 billion in assets under management, focusing mostly on the K-12 marketplace.
Meanwhile, one player in the 403(b) arena is predicting that the 403(b) regulations will be delayed again. The Internal Revenue Service had initially intended to make these changes effective this past Jan. 1.
“I think [the Department of the] Treasury has other things on their mind,” said Richard Ford, senior vice president of marketing for PlanMember Financial Corp. in Carpinteria, Calif., which operates a broker-dealer and investment adviser that serves 400 independent advisers nationwide.
Not to worry
His company has a little more than $1 billion in 403(b) plans, and although his company is a smaller player in this market, he isn’t worried.
“In many cases, we’ll be able to go in there with more competitive and more professionally managed accounts that insurance companies won’t necessarily be able to offer,” Mr. Ford said.
