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Start preparing now for new rules governing retirement plans for school employees.
Spurred by increased IRS scrutiny,
school districts are seeing the benefits of collectively buying retirement
plans or 403(b) accounts for their employees. In January, new regulations will
shift plan responsibility from employee
to employer. In the past, some providers
were allowed to sell directly to employees. The employer’s role was minimal, and pricing was not a concern.
Now, with the cost of running a retirement plan and ensuring compliance falling on the school districts,
pricing for the services associated
with these plans is a primary issue.
As a result, individual K- 12
school districts are creating consortiums and hiring consultants to
help select providers. Buying as if
they are single entities, these consortiums receive a price reduction
on retirement plans from providers.
The consortium approach is already
well established in the 457 market,
with government entities creating
cooperatives to seek greater buying power. This is a major change
for everyone concerned, including
independent advisors, who are probably
worried about whether they can continue in this market. It will be very different, but not impossible, if you start taking
steps now to help you stay in the game.
First, acknowledge reality. The employer will have complete responsibility
for these retirement plans. But what does
that mean for you? Will a major part of
your business disappear, or are there
ways to stay in the game? A little background may be helpful, along with some
techniques to help you survive in this
evolving marketplace.
The new scenario
Under the new regulations, school districts must adopt written plans that spell
out all the details about their employees’ retirement plans and they must be
accountable for all recordkeeping and
compliance. This major shift is leading almost overnight to substantial differences in how 403(b) plans are sold,
starting with how providers are selected.
Today, school districts need less costly
plans that are rich in features and provide their employees with tools for making wise investment decisions, as well as
assistance in handling compliance and
paperwork.
So in addition to the new regulations,
there will be a radically different approach
to provider selection. In fact, the old business model has already changed in some
schools. Districts in Arizona, Illinois,
Wisconsin and Washington are creating
consortiums. Florida has gone a step further: Several K-12-affiliated groups have
banded together to develop a statewide
403(b) plan that could serve as a prototype for every school district in Florida.
What you can do
At first glance, this new model appears
complicated. But it does not have to be
if you break down the challenges into
manageable parts and remember that the
skills that helped you succeed in the past
are just as critical today. Here are some of
those skills:
• Know which providers are still in
the game. There will likely be a shrinking group of providers for the 403(b)
market. For a number of providers, this
has always been a sideline business. Now,
with larger, more complex plans looming, these providers are opting out of a
business they cannot support operationally without significant investment in
infrastructure. You want to work with a
provider who knows the ropes and has
experience in the 403(b) market. Make
sure he has products to meet the consortiums’ needs.
For example, when consultants work
with schools to form a consortium and
select plans, they generally recommend
that a third-party administrator (TPA)
be hired to handle the paperwork.
•Identify the consultants. Con-
