With two daughters in college, I’ve come to appreciate that the three “R’s” continue into higher education. The traditional readin’, ‘rightin’, and ‘rithmatic, carry forward, but I’ve realized lately that a fourth “R” applies. Both my girls are in private colleges, and we’re starting to see an evolution with private higher ed in “R”etirement planning.
What is this evolution, and what do financial professionals need to know?
- First, we’re seeing an increase in the percentage of higher ed plans that have a single service provider. According to the Plan Sponsor Council of America 403(b) plan surveys in 2011 and 2012, 43.9% of colleges had single service provider arrangements in 2011, which was up to 48.1% in 2012. That’s the beginning of a trend. We saw the same thing start in health care about 15 years ago, and a significant number of private health care plans are now run as single service provider ERISA arrangements.
- Why is this happening? For one, administration with multiple service providers is very difficult. With a couple years of final 403(b) regulations behind us, plan sponsors are realizing many of their administrative headaches and compliance concerns come from dealing with multiple providers. (See my blog post on this topic for further detail.)
- Why else is this happening? According to Cerulli, the market is shifting to have greater focus on participant outcomes – what we call “retirement readiness”. We also know that putting together a cohesive education strategy to address retirement readiness with multiple service providers presents an enormous challenge to plan sponsors looking to control consistency of messaging. A single service provider enables an effective education strategy.
- Public institutions have bigger challenges with consolidating service providers. As it is with private colleges, moving from individual contracts to a single service provider can be a big cultural shift and administrative task. Moreover, ERISA doesn’t apply to public plans, so there is no centralized fiduciary that can direct plan changes.
- Participants in plans of higher educational institutions are at the head of the class in terms of their commitment to saving and investing for the future. According to the PSCA surveys, the average account balances of participants in 403(b) plans of colleges is 43% to 46% higher than average account balances in 403(b) plans overall.
- Higher educational organizations have not traditionally worked with financial professionals. This is both a challenge and an opportunity. A financial professional can be valuable to the plan sponsor in several ways as they contemplate the change to a single service provider arrangement. The PSCA surveys in 2011 and 2012 showed that 35.5% and 35.1% of higher ed 403(b) plans have never done an RFP. The surveys also show that on average plans at higher ed organizations have more than double the number of investment choices available to participants than average (55 to 62 versus an average of 26 to 28). Many studies have shown that too many options actually hinder effective retirement savings and investment. Financial professionals can help pare down the choices to a responsible number and mix.
Financial professionals have the opportunity now to get in on the ground floor of this emerging trend as higher educational organizations take on more “R”esponsibility for more effective “R”etirement planning. They’re “R”arin’ to go.
Have you had any success in the higher education arena? Let’s chat in the comments.
Friedman is the tax-exempt national practice leader with the Principal Financial Group, an investment management and retirement leader. A noted expert on 403(b) plan design, he has been consulting with tax-exempt organizations for over 20 years and has been in the retirement plan business since 1986. This blog originally ran on The Principal blog. Follow Aaron on Twitter @1AaronFriedman1
Insurance products and plan administrative services are provided by Principal Life Insurance Company. Securities are offered through Princor Financial Services Corporation, 1-800-547-7754, member SIPC and/or independent broker dealers. Securities sold by a Princor® Registered Representative are offered through Princor. Princor and Principal Life are members of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.
Register or login for access to this item and much more
All Employee Benefit Adviser content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access