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403(b) plans a confusing mix of fees, products and regulators, study finds

By Tobias Salinger

April 5, 2022 4:25 PM


Millions of 403(b) plan participants across the country are paying widely varying fees and choosing from vastly different investment menus, according to a new study.

Clients predominantly from schools, universities, healthcare professions, religious organizations and certain other public employees or nonprofit workers are paying recordkeeping and administrative fees of between .0008% and 2.01% and investment management fees ranging from .01% to 2.37%, according to an April 4 study of 403(b) plans by the U.S. Government Accountability Office. Although the 403(b) defined-contribution plans have assets of $1.3 trillion, “little is known about these plans’ investment options and fee structures — features that can affect how much participants’ retirement savings will grow,” Tranchau “Kris” T. Nguyen, the author and the GAO’s director of education, workforce and income security, wrote in the report.

The findings come after another report from the government watchdog in December cited shortcomings in the SEC’s oversight of FINRA and amid a growing debate over adapting the fiduciary standard of the Employee Retirement Income Security Act to 401(k) rollovers. TIAA-CREF Individual & Institutional Services agreed to pay $97 million last year to settle regulatory cases alleging it failed to disclose conflicts of interest in its rollover recommendations. Plan sponsors often work with financial advisors or other wealth managers in offering their retirement plans, so 403(b) participants represent a significant, but complex, base of clients.

Most 403(b) assets come under the “weak state regulation” of insurance regulators rather than federal oversight because much of the holdings are in annuities, according to Chris Tobe, an industry critic and consultant who authored a book called “Kentucky Fried Pensions.” The range of fees uncovered in the report actually omits “hidden annuity fees” and “the controversial practice of revenue sharing” that explains the low costs in large 403(b) plans, Tobe said.

“The GAO’s 403(b) report compiles a lot of information that shows how dysfunctional the 403(b) market is. But a lack of understanding of profits in the industry has led to misleading at best data on fees,” he said in an email, estimating that the figures “severely” underestimates the fees charged to plan participants by 50% or more.

Representatives for the Investment Company Institute, a trade organization for asset managers whose research is cited in the GAO study, said no one was available to discuss the report. Representatives for the National Tax-Deferred Savings Association, another industry trade group for 403(b) and 457(b) plan providers, didn’t respond to requests for comment.

There is no comprehensive data available about 403(b) plans and fees, especially for non-ERISA plans that don’t file annual reports with the Labor Department, the GAO’s Nguyen said in an email response to Tobe’s remarks. The government watchdog received a total of 45 responses to the surveys it sent out to large firms in the marketplace, and it also found administrative data from one state that keeps a registry of 403(b) investment options, she noted. The investment fees for those 403(b) plans stretched from .02% all the way to 3.74%.

“Given the lack of information, we conducted non-generalizable surveys of both ERISA and non-ERISA plan sponsors and service providers about 403(b) fees,” Nguyen said. “Some of the 403(b) plan sponsors we surveyed reported they did not know the amount of fees associated with their plan’s investment options.”

Like the discussion of ERISA rules governing 401(k) rollovers, the 403(b) plans span several kinds of regulators and financial firms including wealth managers, but also insurers and asset managers. ERISA doesn’t apply to plans offered by public schools, colleges and universities, or to those of religious organizations, but the 403(b) plans of most tax-exempt employers in the private sector do receive those protections. Besides the state insurance commissioners, the Department of Labor’s Employee Benefits Security Administration, the SEC and the IRS excercise a degree of supervision over the plans, according to the GAO’s report.

 Assets in 403(b) plans

Assets in ERISA 403(b) plans soared by 97% between 2010 and 2019 to $617 billion, with the share of 403(b) assets subject to ERISA growing from 37% to 57% during that span. Assets in non-ERISA 403(b) plans fell 13% over the last decade, according to the watchdog’s estimates.

 Participants in 403(b) plans

The number of ERISA 403(b) plan participants jumped 39% to 9.9 million employees between 2010 and 2019, despite there being about 1,000 fewer plans overall due to consolidation in healthcare and other fields. Among ERISA participants, 56% are in healthcare and 27% are in educational fields.

 Mix of offerings

At least 75% of ERISA 403(b) plan assets were part of plans offering both annuities and mutual funds at the end of 2019. However, the amount in plans that only include annuities rose 32% to $74 billion over the last decade, and the number in 403(b) accounts that only have mutual funds climbed 60% to $64 billion.

 Many types of fees

Participants pay a half dozen types of fees — for recordkeeping and administrative services, consulting and investment advice, investment management, marketing and distribution, trading and other transactions, and wrap accounts. For those with annuities, surrender charges apply for any liquidation during set time periods as well.

 The difference of 50 basis points over time

Over a 20-year period, assuming annual investment returns of 4%, an investment of $100,000 with a fee of 25 basis points will grow to $208,815. An extra 50 bps cuts out $19,231, or 9%, while an extra 100 bps reduces the yield by $44,953, or 22%.

 Range of fees

Service providers of 403(b) plans reported direct participant fees or compensation ranging from zero to 2.72% of assets and indirect costs or pay from zero to 2% a year. Among 14 sponsors who shared recordkeeping and administrative fee information, the seven smaller plans had costs between .06% and 0.27%, while the seven largest reported fees between .0008% and 0.18%.

 Number of funds and products offered to participants

Participants in 403(b) plans typically have more investment options than 401(k) holders, according to two industry studies cited in the report. Among 20 sponsors surveyed by the GAO, the investment menus varied substantially. Seven sponsors had 30 or more options, a half dozen offered between 16 and 29, and seven others had 15 or fewer.

 Some plans serving teachers and administrators lack basic information

Plan sponsors in educational institutions displayed a similar variation, according to the studies. “University, state-sponsored and plan sponsors with $1 billion or more in assets reported taking multiple steps to reduce fees, while other sponsors more often reported not having information that would help them monitor fees,” the study says. “For example, five public school district plan sponsors reported that they did not know expense ratios, which are measures of how much of a fund’s assets are used for administrative and other operating expenses, for investment options offered by their plan that would also allow them to monitor fees.”

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