Does your retirement plan practice focus mostly on for-profit businesses? If so, you may be missing out on a growing niche—not-for-profit organizations.
In the U.S., nearly 30,000 not-for-profit organizations account for $892 billion in retirement plan assets—with $711 billion (or 80 percent) of that in 403(b) plans alone. Assuming market returns are at historic averages, Spectrem Group projects assets within non-profit defined contribution plans will grow at nine to 10 percent annually over the next five years[1].
That's an opportunity that's too big to ignore. And due to a number of changes in the 403(b) world, not-for-profits are increasingly looking for help.
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The 2009 final 403(b) regulations made sweeping changes in the 403(b) world, and many sponsors are still working through the changes needed to comply. In fact, more than 43 percent of responders to PSCA's 403(b) survey have not made plan design changes as a result of the new rules[2].
To make it easier to comply with these rules, many 403(b) plan sponsors are drastically reducing the number of providers they make available to employees. On average, for example, colleges and universities reduced the number of providers from about 15 in 2007 to about six in 2010, according to the 2011 403(b) Plan Design Survey [conducted by the Profit Sharing/401k Council of America (PSCA) and sponsored by the Principal Financial Group]. That's more than a 60 percent decrease.
The new rules are also leading many plan sponsors to switch providers in search of help with their plan compliance and an updated investment platform. Overall, 14 percent of 403(b) plan sponsors switched or eliminated plan providers in 2009, compared to just 7 percent in 2007.
TPAs have increasing influence in 403(b) market
As a result of these developments, more and more 403(b) plan sponsors are turning to third-party administrators (TPAs) for help. TPAs have grown as a center of influence for the 403(b) market over the past two years, partially due to their value in handling administration across all of a plan sponsor's service providers.
Another reason for the increased use of TPAs is the challenges ERISA 403(b) plan sponsors face in handling the administration of legacy assets—individual annuity assets under the plan that are serviced by multiple prior service providers. TPAs are an attractive solution to this challenge because they're independent, they're not a threat to service providers and they can help the 403(b) plan sponsor gather necessary data from prior service providers.
According to Spectrem Group, an estimated 40 percent of 403(b) plan sponsors were working with TPAs in 2010, up from just two percent in 2007. Overall, 28.7 percent of PSCA survey respondents report using a TPA in 2010. PSCA survey respondents using a TPA include religious institutions, hospitals, health care, libraries/museums and higher education.
In many cases, plan sponsors who offer multiple plan providers for their employees to select from have added a TPA. The role of the TPA may be to simply gather information across all providers to help ensure that participants comply with the limits and rules governing these retirement plans. Or the plan sponsor may look to the TPA to be involved at some capacity with the plan's recordkeeping.
How to work with TPAs
If you'd like to grow your 403(b) business, consider working with TPAs. As centers of influence in the 403(b) market, TPAs can provide a lot of expertise in plan design and can help provide local support.
You can add value for TPAs by offering services that they may not provide. For instance, TPAs are typically not active in the enrollment process. By providing robust participant education—or by working with providers that offer strong participant education—you can provide a lot of value in this area.
Find a provider that's TPA-friendly
Some retirement plan service providers are more open than others to working with TPAs. Some bundled-only service providers are making the case they can handle legacy assets without a TPA. However there are providers out there who believe, as we do at The Principal, that working with a TPA is a better solution for the financial professional and the plan sponsor.
Don't miss this chance
The 403(b) market offers a tremendous opportunity to grow your business. By working with 403(b) plan sponsors' trusted partners—such as TPAs and TPA-friendly service providers—you can make your mark on this $711 billion business.
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