403(b) Fair

Viewpoint: 403(b) Fair—Promoting Greater Transparency for 403(b) Plan Fees


By Anthony Agbay, The Agbay Group


Until recently, the market for 403(b) defined contribution plans—which can be sponsored by public-sector educational institutions, including universities, nonprofit charitable organizations (including many hospitals), Indian tribal organizations and churches—was like the Wild West, where anything goes. Over the past few years, new 403(b) regulations have changed the landscape significantly. While multivendor plans remain an option (unlike single vendor 401(k) plans), the 403(b) regulations require plan sponsors to adopt a written plan document and ensure that the plan operates in accordance with its terms. In addition, new mandatory procedures include limits on contributions and distributions and requiring a third-party administrator to monitor employee eligibility.

When the regulations were being considered, many opined about their likely impact for good or ill. Now that they are in place, actual outcomes can be indentified and discussed.


Unintended Consequences

Since the adoption of the regulations, investment options in 403(b) plans have become streamlined but more limited. Many vendors have exited the market or stopped accepting new contributions, leaving fewer companies and fewer options for participants. This is hurting consumers through reduced competition and possibly affecting their ultimate goal: a comfortable retirement.


Surrender to Fees and Commissions

Fewer vendors and investment options available to participants did not increase the competitiveness or fee transparency, however. Fee structures and commission schedules can vary dramatically among vendors in the same school district. For example, one teacher could invest $10,000 in a fund that pays the broker a 7 percent commission and has a 10-year surrender period (during which, if the fund were sold, the investor would be charged a deferred sales charge). Another employee could invest $10,000 with a competing company (or even the same company) and be offered an investment with a different fee schedule—perhaps lower fees and no deferred sales charge.


Investors in a retirement plan shouldn’t wonder if their colleagues are getting a better deal on fees and investments. In fact, the total amount of assets in a school district, for example, should be taken into consideration and the investments should be priced at the plan level and not at the participant level. Level pricing for fees and advisor compensation is the solution to what some investors perceive as deceptive, misleading or unfair sales practice. It could reduce if not eliminate the concerns of employees wondering if others are receiving preferential pricing based on who they know, who they are or how much they have to invest.


403(b) Meets the 401(k)

The 403(b) market has long been highly individualized and retail-focused, while the 401(k) market has been more efficient and institutionalized. The 401(k) market has known for years that pooling assets allows for a more competitively priced platform, reducing fees for participants.


Most teachers are in unions and understand bargaining collectively. However, when it comes to using plan assets as a bargaining tool to reduce costs to their 403(b) plans, most schools districts can't do so because the kindergarten-through-12 market does not embrace, nor is it designed to allow for, employer-level scaled pricing.

The 403(b) market could benefit by embracing the bargaining power of the scale of its plan assets. Take for instance the following hypothetical comparison: 



XYZ Corp.'s

ABC School District's 403(b)





$200 million

$200 million


Pooled—based on plan assets of $200 million

Based on amount in each employee’s individual account

Average Fee


Varies dramatically based on each employee – as high as 5.75%



It doesn’t make sense that the school district employees are disadvantaged based on pricing compared to a corporate plan with nearly identical plan characteristics. Just as the corporation levered its $200 million in plan assets to reduce and standardize pricing, so too should the school district.


A Better Solution

Schools should demand that vendors that are allowed to offer 403(b) investments to their employees provide level pricing across the board for all employees—from the janitor to teachers to superintendents. This would foster an environment of competitiveness and fairness and a better understanding of fees. This solution probably will require a third-party advocate such as an independent consultant.

Because the 403(b) market is primarily participant-driven, it is the participant’s charge to negotiate, understand and determine fees. However, the college and its employees could benefit from an advocate looking out for their interests. This is not a responsibility of a TPA, whose role is to simply administer the plan and make sure contributions and distributions are compliant. Making certain individuals responsible for plan oversight in a fiduciary capacity fosters an environment in which participants’ assets are protected from predators and abuse.


No one expects all vendors to adopt the same pricing, because their investments, platforms and services can vary dramatically. However, if each vendor offered one pricing model, employees would be able to evaluate the fees better through greater transparency and disclosures. Typically, investors with more familiarity or understanding of the plan and its investments will remain and invest more money. Plan service providers increase the size of their assets under management, and plan participants save more for retirement. Everyone wins. 


The Best Solution

The non profit world could take a page out of the for profit world when it comes to retirement plan administration – particularly the single vendor model. In contrast to the multi-vendor model, the single vendor model benefits its participants in several areas including premier investment choices and lower costs. Because the single vendor model leverages its assets as a whole, it can negotiate lower fees and have strict oversight and diligence in the investment menu. The multi vendor model often has providers “pushing” their more profitable, proprietary investment choices from several sales people in the field.


In contrast, the single vendor model typically provides for a low fee, zero commission model thus focusing on the goal for the employee (retirement) and not on the commission or sale.


Wayne Gretzky said, “a good hockey player skates where the puck is; a great hockey player skates to where the puck is going to be.” I too think we have an opportunity to be visionaries by moving to where the best retirement standards are going to be and not by maintaining the status quo. Plan sponsors should offer a best-in-class investment menu for the non profit world in the form of a single vendor retirement plan solution and put the flawed multi-vendor retirement platform behind us. In doing so, there are definitely going to be winners and losers. The losers will be the sales representatives and their lucrative commissions; the benefactors will be the participants with greater transparency and oversight with lower cost investments resulting in greater savings for retirement.


Anthony Agbay is president of The Agbay Group, an independent retirement plan consultant specializing in fiduciary oversight strategies and retirement plan services. He can be reached at info@agbaygroup.com.



A Model Disclosure Form for
403(b) Plan Fees


403(b) retirement plans are not covered by the latest federal fee disclosure rules for 401(k) plans, and public school employees often receive no help from their school systems in making informed investment choices. To help plan participants make better choices, in February 2012 an industry-led 403(b) Transparency Taskforce that included the National Education Association, the National Tax Sheltered Accounts Association and the American Society of Pension Professionals & Actuaries (ASPPA) launched an industry standard called the 403(b) Model Disclosure Form. The form is designed to offer public school employees simple and clear information about the services and fees associated with their retirement savings choices so they can make the best decisions about their 403(b) retirement savings.

Although schools and other plan sponsors will not be required to adopt the model disclosure form, the task force hopes that they will use it to educate their employees about the retirement fund options.

“Transparency benefits everyone in the 403(b) marketplace—that’s why we urge adoption of the 403(b) model disclosure form by public schools throughout the country," said ASPPA Executive Director and CEO Brian Graff. "We believe that once these standards are in use, school employees will have a better handle on their retirement plan options.”