Heard on the Street

Back in July, I posted a blog about the trend emerging among 403(b) plans sponsors in higher education – in particular among private colleges and universities. After several years of administering their 403(b) plans under the full force of the final 403(b) regulations, and ERISA, many are now aware of the efficiencies that can be realized and the ease of compliance by consolidating down to a single service provider.

I caught up recently with Vince Rainforth at The Principal® about tax-exempt distribution. I asked him what we’re seeing on the street relative to this emerging trend.

Vince Rainforth:  We’ve seen financial professionals reaching out to the private colleges in their communities and their alma maters. They’ve been very open to conversations.

Q: What are the topics of those discussions?

VR: There are two main conversations. The first is benefits focused, and the second is more compliance focused. The benefits conversations look at the totality of the pension benefit arrangement, and review the overall objectives of the program from both a benefit level and cost standpoint. They are looking at all plans including the defined benefit (DB) plan and the 457 deferred compensation plans.

The financial people are very interested in the DB conversation. One of their biggest concerns is funding volatility. Especially in smaller colleges, it’s likely that no one has ever gone in before to discuss options available to them. Opportunities may include helping them understand the benefits of building a glide path to capture and protect funded surplus — or helping them analyze how much risk they’re taking. The trend for DB plans is reduction in equities and increase in duration match or cash matching liabilities.

A second common conversation is compliance oriented – and there are a lot of things to talk about.  457 plans are a great tool for providing executive benefits, and not surprisingly, the Internal Revenue Service (IRS) has announced they will be focusing a compliance effort in this area. The plan sponsors want to make sure their plans are okay, before they get audited. One big problem we’ve seen is that 457 plans of private colleges and universities are supposed to “unfunded”, and any assets set aside are supposed to be general assets of the college. When you read the investment contracts, they often aren’t set up that way. Those plan sponsors that are aware of the problem want to fix this now. Others may not be aware of potential problems and would benefit from a review.

Another compliance issue is consistent with prior blog posts. 403(b) plans that have assets with multiple service providers are very complicated. Some providers are telling their clients they’ve got their backs, but that could mean only that they have some simple systems for tracking loans and hardships.  That doesn’t help with small amount force-outs, conflicts with beneficiary designations, form 5500 or the annual audit.

Q: Any guidance to financial professionals?

VR:  Leverage your contacts to help get in the door with these private colleges. Although they have not traditionally sought the guidance of financial professionals, they need help, and most are open to receiving it.

We’ve recently developed some new prospecting materials to help financial professionals take advantage of this growing private higher education market opportunity. If you’re interested in finding out more, drop me a comment below (your message will be kept private).


In addition to blogging here, I also tweet regularly about topics of interest to Tax Exempt plans. Follow me on Twitter: @1aaronfriedman1.

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While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products and plan administrative services are provided by Principal Life Insurance Company, a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.

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