MML Clip: 403(b) Plans Looking To Make Investment Changes

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Within the universe of small retirement funds, 403 (b) plans rank among the smallest of the small, with average plan assets of $12.5 million, according to Brightscope. Historically, sponsors of 403(b) plans have administered them with less rigor than other types of retirement plans, said David Wray, president of the Plan Sponsor Council of America (PSCA). But regulatory changes that went into effect in 2009 placed greater emphasis on 403(b) plans’ fiduciary responsibilities and pushes for more due diligence. “As 403(b) plans are recognizing their fiduciary duties they are moving to reduce the number of investment options offered to participants,” Wray said.

According to a recent joint survey of 403(b) plans by the PSCA and Principal Financial Group, nearly 40% of plan sponsors made changes to their investment line-up in 2011, and close to 26% are set to make comprehensive redesign changes to their plans.

Survey data showed that the average number of investment options for 403(b) plan sponsors is 28. “That’s indicative that someone’s gone in there and added whatever they want. Doing that may cause analysis paralysis for participants. There’s an opportunity there for consultants to come in a pare down investment options to an appropriate level,” Aaron Friedman, national non-profit leader for Principal Financial Group, told MMI. Travis Dutton, v.p. of Lockton Financial Advisors, noted that while demographics of the plan apply, an appropriate number of investment options for 403(b) plans is between 14 and 15.

According to Friedman, the survey also highlights 403(b) plans’ need for consultants. “We saw that 22% of 403(b) plans are using money market funds. That’s awfully high and shows that 403(b) plans need consultants. Money market funds are short-term investment structures that aren’t appropriate for retirement plans.”

One investment change that 403(b) plans are already making is the adoption of target-date strategies. During 2011, 72.5% of plans sponsors offered target-date funds as an investment option, compared to 69.1% of plans in 2010.

Target-date focus isn’t the only shift. Many 403(b) plan sponsors are in the process of moving to the 401(k) model where there is only one recordkeeper, Wray said. The survey also showed that 403(b) plans are adopting more Roth features, 21.7% in 2011, up from 16.9% in 2010.

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