The 403(b) market – room for future upgrades?

In my last post I talked about my neighbors’ discomfort with change, even though it positions us for the future. Some have complained a new TV service is inferior. While I agree there may be fewer bells and whistles, the new provider uses a fiber optic-based system with plenty of room for future upgrades.

It’s a lot like what I see when looking at the Plan Sponsor Council of America (PSCA) 2017 403(b) Plan Survey – some areas appear to have plenty of room for future upgrade.

One area that we believe stands out in particular is investment policy statements (IPS). While it’s a generally accepted best practice to have an IPS, only a little over half (58 percent) of plans in the survey have one in place. Another 1 in 5 (19 percent) said they didn’t have one at all. The remaining chose unknown.

More telling in the breakdown of the unpublished data behind the survey, over 61 percent of those with an IPS were ERISA plans. An IPS is a best practice for an ERISA plan, but they often aren’t necessary in a non-ERISA environment where the employer is typically hands-off. Yet, according to this data, nearly half of non-ERISA plans have an IPS. ERISA plans without one take note.

We believe this area clearly needs improvement. Advisors can show their value by helping plans adopt an IPS to protect fiduciaries in the event something goes wrong.

Prepare for an uncertain future

I’ve had many recent conversations with wholesalers and plan advisors who have concerns about the uncertainty of working with 403(b) plans these days. Especially since 403(b) is not the first area of thought for firms putting in policies around new Federal rules. There’s also ambiguity around the role of education, and even what constitutes education versus advice. Plus we don’t yet know if certain investments can be used. But uncertainty brings opportunity, too. The survey shows that less than half of 403(b) plan sponsors work with an advisor – and with confusion over regulations, they may need help.

With all the future uncertainty, everyone wants to know where they can best add value today. Here’s the short answer – work with plan sponsors to ensure they have smart plan design and policies in place. Just like ultra-high speed internet, advisors can help position 403(b) plans for the future even if it’s still a bit unclear.

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This document is intended to be educational in nature and is not intended to be taken as a recommendation.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

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