Educational Groups Hope to Improve Compliance by Simplifying Their Plans

Jul 23, 2021

By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement Plans

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Retirement plans for nonprofit and tax-exempt entities can often look very different than the retirement programs used by corporate employers, such as 401(k) plans. This can result in some unique challenges for both the plan sponsor and participants of this particular segment of nonprofits. This is particularly evident with 403(b) plans – also known as Tax Sheltered Annuities – which are a popular plan design for educational entities such as private K-12 schools, colleges or universities, and public schools. Increasingly, educational entities are exploring opportunities to update and modernize their retirement plan structures to make them easier to administer and to also improve plan sponsor compliance.

Traditionally, 403(b) plans are limited to mutual funds or annuities and many educational groups have historically designed their 403(b) plans to offer participants access to investment choices from multiple providers – often totaling more than 25 options* – and often serviced through multiple financial professionals and representatives. Typically, the selection of mutual fund and annuity options for these 403(b) programs is often random, with little consultation with an investment professional who can assist in the creation and review of a comprehensive investment menu.

Breaking from tradition, however, many educational entities are now beginning to recognize that monitoring compliance across multiple investment options and service providers can be difficult and can potentially lead to compliance violations of the Internal Revenue Service (IRS) code.  In addition, studies (like one conducted by Columbia University **) have shown that too many investment options can have a detrimental effect on participation and overall savings rates.

These issues have caused an increasing number of educational entities to rethink and update the structure of their 403(b) plans to mirror retirement programs like 401(k) plans. As a result, more of these entities are:

  • trending away from 403(b) plans with multiple providers – and an excessive number of investment options – and opting to significantly reduce the number of providers or choose a single provider.
  • increasingly adopting 401(k) best practices, such as working with a financial professional to create an Investment Policy Statement to provide a comprehensive due diligence process for the selection and monitoring of investments available in the 403(b) plan.

Before implementing any changes to your retirement plan, remember to consult with your tax/legal advisor as well as your investment/financial advisor.


*2018 Plan Sponsor Council of America (PSCA) 403b Survey

**Iyenger, Jiang, Huberman ‘How Much Is Too Much?’ Columbia Business School, 2003