Choice matters in 403(b) plans
Despite what we know about choice overload, research shows some participants need more choices to make good decisions.
When 403(b) plan participants have more choices of investment providers, they tend to have higher annual contributions, higher account balances and “more positive attitudes toward their 403(b) plan overall,” according to a December white paper from Equitable. The paper, “Benefits of multiple 403(b) providers,” was written by Edward Kenney and Tali Yarmush of Equitable, in partnership with Zeldis Research Associates.
Related: Teachers and retirement saving: What you need to know when the last bell rings
Plan participation is especially important for teachers in 403(b) plans, the authors write, as state pension funding gaps and reduced benefits make them more reliant on those plans.
Citing research from the ASPPA Pension Education and Research Foundation, the authors show that states that have cut back on the number of investment providers that participants can choose from suffered lower participation rates.
In Colorado and California, participation fell 54% and 56%, respectively, when plan administrators cut the number of investment providers, while in Pennsylvania, participation dropped almost 40%.
Iowa legislators cut the number of providers available in state public school plans in order to minimize fees, and saw participation fall by as much as 50% in some counties as a result, according to the paper.
On the other hand, participation rises steadily from 25% in plans with one vendor to 33% and plants with 15 or more vendors, according to the National Tax-Deferred Savings Association.
Equitable sponsored its own research and found average account balance shows a similar trend.
Account balances increased significantly between plans with a single provider, and between two and four providers, and continued to increase with the number of investment providers. The median account balance in plans with more choices is $40,000, compared to $30,000 in plans without provider choices, Equitable found, and annual contributions were about 20% higher in plans with more choices.
Related: 403(b) retirement plan sponsors shifting focus
Among the other benefits of increased provider choice in 403(b) plans that Equitable identified are that:
- 66% of participants in plans with more choices say they have greater familiarity with their plan, compared to 50% of participants in plans with fewer choices.
- 70% of participants with more choices say they are satisfied with their plan, compared to 57% of those in plans with fewer choices.
- 87% of participants in plans with more choices say they are confident about their retirement prospects, compared to 80% of those in plans with fewer choices.
- 69% of participants in plans with more choices say they monitor their account performance, compared to 61% of those implants with fewer choices.
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