Big Change to Teachers' Funds
Clearer Rules, New Options
Are Coming in 403(b) Plans
By JILIAN MINCER
July 28, 2007
The retirement savings plans available to most teachers and many nonprofit employees are about to get a dramatic makeover.
The Treasury Department and IRS have issued long-awaited regulations that will make the 403(b) savings plan look more like its younger cousin, the 401(k) retirement savings plan.
SUBSTITUTE FOR TEACHERS
• The News: Retirement-savings plans for teachers and others, known as 403(b) plans, will look more like 401(k)s.
• The Upside: Clearer rules, perhaps lower-cost choices.
• The Downside: Less flexibility to move assets. The new rules will allow transfers only to 403(b) investment managers with which the district or employer has a relationship.
For investors in these plans, the changes will mean clearer explanations of the plans from their employers and, eventually, lower-cost investment options with potentially higher returns. Some of the big mutual-fund firms may benefit at the expense of some insurance firms and the agents who sold investments to teachers.
Less Flexibility
However, investors will lose much of the flexibility they now have to move their assets to any investment manager offering a 403(b) vehicle. And plan sponsors -- the employers -- will have to ratchet up their oversight and involvement in their employees' retirement plans.
"There's going to be a shake-up in the industry," says D.J. Lucey, an analyst at Cerulli Associates, a consulting firm.
Like 401(k)s, 403(b) plans are defined-contribution retirement plans, where the amount of money withdrawn at retirement is determined by how much money is set aside and how that money performs when it's invested. Money is set aside pretax. Usually colleges, school districts and not-for-profit employers including hospitals are eligible for 403(b) plans.
The plans were introduced in the 1950s, with few administrative demands on the employers sponsoring them. Sales were originally dominated by insurance companies, which typically sold annuities; annuities still account for more than 70% of the investments in 403(b) plans.
The 401(k) plan wasn't launched until 1981, when it took off in another direction, toward mutual-fund investments, which often included an employee match. These savings plans, offered mostly by private companies, had more stringent rules and fiduciary requirements of plan sponsors.
The new rules bring 403(b) plans more in line, though not entirely, with the requirements of 401(k) plans, forcing plan sponsors to take a more active role in administering them.
Tracking Problem
The IRS sought the new rules because it was difficult for it to track 403(b) contributions and withdrawals. As with 401(k) plans, there are limits and tax consequences for contributions and withdrawals.
While the 403(b) plans available at many colleges and hospitals already have made many of these changes, the new rules will have a profound impact on school districts and small not-for-profit employers who had little oversight or involvement in their plans.
By forcing 403(b) sponsors to actually look at and think about their plans -- and shoulder more administrative burdens -- the new rules may boost the big investment-management firms that offer low-cost products and have the administrative support school districts will now need.
Dan Otter, a former teacher who owns and operates the 403bwise.com Web site, says the new rules provide school districts with "the opportunity to do the right thing for their employees" by giving them less-expensive investments and more information.
Write to Jilian Mincer at jilian.mincer@dowjones.com
