New regs may give 403(b)s new life

Starting in 2009, new rules will change the landscape of the 403(b) industry, making the plans look more like 401(k)s and increasing their attractiveness to savvy advisers in the process, industry leaders believe. The 403(b) is a retirement plan sold to non-profit groups such as K-12 schools, universities, religious entities, health-care providers and other not-for-profit organizations. Under the old rules, many 403(b) plans operated with minimal oversight from employers, and no clear guidelines. For instance, some school districts offered 50 or more 403(b) plans to their employees. For years, many advisers ignored these non-profit plans, choosing to focus on the more lucrative 401(k) market because the 403(b) market was fragmented and plans were sold individually rather than to organizations as a group.
But new regulations issued by the Department of the Treasury and the Internal Revenue Service require 403(b) plan sponsors to maintain a "written plan document," which essentially spells out the terms and conditions of a plan. It also clarifies the responsibilities of all those involved in managing a plan. As a result, companies such as The Hartford (Conn.) Financial Services Group Inc., The Principal Financial Group Inc. of Des Moines, Iowa, and AIG Retirement, which is the marketing name for AIG VALIC, a Houston subsidiary of New York-based American International Group Inc., have begun education and recruiting efforts aimed at 401(k) advisers to teach them more about the 403(b) business. Initially, some advisers feared that 403(b) plans would take a hit because the plans will more closely mirror 401(k) plans. But advisers who have relationships with plan sponsors feel confident that they can win over 403(b) business. Advisers themselves have been seeking information about the new rules, Mr. Friedman said. "They're coming and looking for it. People are hungry for this information," Mr. Friedman said. The 403(b) market had $727 billion in assets in 2007, according to projections from Boston-based Cerulli Associates Inc., and the group predicts that assets will grow to just above $1 trillion in 2010. "The ability of these plans to be more like the 401(k) plan in the marketplace might mean more opportunities for advisers," said Tom Mod-estino, a senior analyst at Cerulli.

'ENORMOUS OPPORTUNITY'

Recently, Joe McLaughlin, vice president and wealth adviser with New York-based Morgan Stanley, said his team, which focuses on qualified plans, has begun to vie for 403(b) assets. In the past, he's worked mostly with 401(k) plans. Mr. McLaughlin is part of The Kelliher Group, a Norwell, Mass.-based team within Morgan Stanley that is dedicated to defined contribution plans. The group manages about $1.2 billion in assets. "The 403(b) marketplace has been underserved for decades," Mr. McLaughlin said. "Clearly, they're starting to have the same needs as a traditional 401(k) plan sponsor would have." Previously, employers in the 403(b) marketplace didn't have the responsibility to oversee plan documents. Now Mr. McLaughlin believes that his team's expertise at handling plan sponsor issues will serve it well in luring 403(b) business. "For anyone who's been working in the qualified-plan place, this just represents a whole other market that hasn't existed for us," Mr. McLaughlin said. "I think it's an enormous opportunity." The changes in the 403(b) market also create a huge opportunity for retirement advisers, said Tom Foster, a national spokesman for corporate retirement plans at The Hartford, which manages about $932 million in 403(b) plans. The company has worked with about 15,000 advisers of 401(k) plans and about 1,000 403(b) advisers in the last year. Mr. Foster said he's been reaching out to the 401(k) advisers and letting them know about the opportunities in the 403(b) space. However, many of the retail advisers who previously have worked with participants in these plans may be in jeopardy of losing the business because they haven't established a relationship with employers, retirement industry leaders said.

BUILDING RELATIONSHIPS

"Retail advisers have a bigger challenge, and that is, if they continue to keep the relationship at an individual basis, then [their] business is at risk. They need to develop the plan sponsor relationship," said Aaron Friedman, national-practice leader for the non-profit practice at The Principal, which manages about $15 billion in non-profit assets, including 403(b) plans. "I think there's still a place for retail advisers, but the question is: What is their game strategy to adapt to these new regulatory changes?" asked Linda Segal Blinn, Windsor, Conn.-based vice president of technical services with ING U.S. Financial Services of Atlanta. ING's assets in 403(b) plans were $27.1 billion as of Sept. 30.
There's no question that the new regulations appeal to advisers who work in the 401(k) arena, said Chris Cumming, senior vice president at Great-West Retirement Services of Greenwood Village, Colo., whose 403(b) assets were nearly $8.3 billion as of Sept. 30. "There was little or no oversight or ownership by the school districts. Now they need plan documents and fiduciary-sound folks to look at investment options. If you look at the universe in the 401(k) space, that's what the registered investment advisers do," he said. There are also many providers who are willing to help advisers, said Bruce Corcoran, senior vice president for national markets and education for AIG Retirement. His company has documents ready to help advisers set up these plans. His firm's assets for the 403(b) market are a little more than $46 billion with over $27 billion in the education segment at of Sept. 30, 2007. Lisa Shidler can be reached at lshidler@crain.com.