Many school districts around the country are paring down the number of 403(b) providers because they want to keep better track of fees and make it easier to comply with new Internal Revenue Service rules set to be issued later this year. The new rules say that transfers from one provider to another are no longer tax-free unless it is to an approved provider and that districts have to provide contribution information to the IRS. They also have to ensure compliance with contribution limits and do better due diligence of providers.
The Shawnee Mission School District of Shawnee Mission, Kan., is deciding among finalist firms, said Joy Torgerson, manager of human resources. While the school district’s 403(b) is relatively small, at about $6 million, there are 17 providers and the district is trying to get that down to six or less. “The new regulations are a good reason to clean it up,” she said. While the rules weren’t the sole reason to change, it provided an impetus the district otherwise wouldn’t have had. The finalists are Waddell & Reed, Smith Barney, Security Benefit Corp., MetLife, AIG VALIC and Lincoln Financial.
In the Jefferson County School District, which covers a swath of Colorado near Denver, Benefits Manager Lisa Eacker said the school district moved to a single provider in part to better track what its participants were paying for their funds. “I was shocked,” she said. “We had 55 providers.” With so many it was difficult to track what the fees were.
One provider also makes it easier to keep track of data needed for the IRS. Much of the compliance, she noted, was let lapse over the years because the IRS rarely audited a school district and it wasn’t a big issue. Another benefit is that the district now knows to stop contributions immediately if there are hardship withdrawals, since there is only one provider who will tell the district what has happened. The district eventually switched to Great-West Retirement Services in January. Eacker said she doesn’t have a good estimate yet of how much in assets the 403(b) will have because many people are still moving money from their old providers to Great-West.
At AIG, Todd Buchanan, senior v.p. of market management, said requests to narrow the number of providers are present in many of the RFPs the firm receives. But he said it is unlikely that exclusive arrangements will become common. One reason is that many people who work in school districts develop close relationships with 403(b) providers and see reductions in their choices as taking something away. Don Roberson, senior v.p. and head of distribution for defined contribution and executive benefits at Lincoln Financial, said he also sees a change in behavior on the part of school districts buying plans, becoming more like institutional buyers, as 403(b)s look more like their 401(k) counterparts.
In Virginia, the Prince William County School District has a single provider for its $300 million 403(b) and it will ask for that again when it drafts another RFP later this year. The current provider is Lincoln Financial. Sue Taylor, supervisor of benefits, said the administrative costs as well as the multiple fees the participants were getting charged were a big reason to change to a single firm, and with the tighter compliance rules form the IRS she is glad it did so.
Mike Beczkowski, consultant at Bolton Partners, said the new regulations will create barriers to entry for some firms, which is not an entirely bad thing. “These firms just sort of accreted over the years. They never really paid attention--it was like, ‘you want to contribute to X firm just give us the form’ and there was never any type of due diligence.” As school districts (as well as community colleges) start to reduce the number of providers, some kind of due diligence is more necessary.