403(b) Plan Design Continues to Evolve

403(b) plans have undergone many changes since IRS regulations were finalized in 2007.

A report from BrightScope and the Investment Company Institute notes that it is difficult to get a full picture of the 403(b) plan market as some plans are not governed by the Employee Retirement Income Security Act and therefore do not file a Form 5500 with the Department of Labor. However, the report offers a profile of the 403(b) plan market.

In the report, the term ERISA 403(b) plan refers to 403(b) plans filing Form 5500 with the DOL. A large ERISA plan is one that filed Form 5500 Schedule H—typically plans with 100 participants or more. Data from ICI, the Federal Reserve Board, and the BrightScope Defined Contribution Plan Database suggest 53% of all 403(b) plans were ERISA plans as of year-end 2018. Total assets in all 403(b) plans were approximately $1 trillion.

In 2018, overall, 16% of large ERISA 403(b) plans reported that they automatically enrolled participants. More than one-quarter of large ERISA 403(b) plans with more than $100 million in plan assets used automatic enrollment. Because larger plans are more likely to have automatic enrollment, overall, 29% of large ERISA 403(b) plan participants were in plans with an automatic enrollment feature.

Data from PLANSPONSOR’s Defined Contribution Survey indicates there has been a gradual increase in the overall use of auto-enrollment, from 37.1% of 403(b) plans in 2017 to 42% in 2021. 

According to the BrightScope/ICI report, the DOL Form 5500 Research File data for large ERISA 403(b) plans indicate that employers made contributions in 81% of these plans in 2018, an increase from 71% in 2009. Larger ERISA 403(b) plans in the sample—in terms of number of participants—were slightly less likely than smaller plans to provide employer contributions. For example, in 2018, more than 80% of large ERISA 403(b) plans with 100 to 999 participants had employer contributions, compared with about 72% of large ERISA 403(b) plans with 10,000 participants or more.

The data also shows that in 2018, 61% of the large ERISA 403(b) plans analyzed (a random sample of those that filed Form 5500 Schedule H and had employer contributions) had a simple match formula, 31% made automatic contributions without respect to employee contributions, and 11% had both a simple match formula and automatic contributions. Among the 61% that had a simple match structure, the most common formulas (60%) matched 100% of contributions up to some percentage of employee salary.

BrightScope and ICI note that historically, the investment menus of 403(b) plans have included multiple providers, each offering their full complements of mutual funds or annuity products. As regulations have changed to impose a stronger plan structure and to encourage plan sponsors to take more responsibility in selecting an appropriate investment lineup, the number of investment options on the core menu has declined.

Because legacy investment options may present a skewed picture of the investment options that participants have to choose from, the report primarily focuses on core investment options—those that hold at least 0.5% of total plan assets.

The study finds the average number of core investment options was 26 among large ERISA 403(b) plans in 2018. Counting a suite of core target-date funds as one investment option, large ERISA 403(b) plans offered 17 core investment options, on average, in 2018.

Mutual funds were the most common investment vehicle in large ERISA 403(b) plans in the BrightScope database, representing 61% of assets in 2018. Fixed annuities held an additional 20% of assets, and variable annuities held 19%.

Large ERISA 403(b) plans have become increasingly likely to offer TDFs. In 2018, 85% of large ERISA 403(b) plans offered TDFs in their core investment lineups, compared with 51% in 2009. The share of participants who were offered core TDFs increased to 88% in 2018, from 71% in 2009. The share of plan assets invested in TDFs also increased, rising to 26% in 2018 from 7% in 2009.

The BrightScope/ICI analysis found that mutual fund expenses decreased between 2009 and 2018 in large ERISA 403(b) plans across all asset classes. For example, domestic equity mutual funds—which include both index and active investment styles— had an asset-weighted average expense ratio of 0.38% in 2018, down from 0.56% in 2009. Similarly, domestic bond mutual fund expense ratios—which include both index and active investment styles—declined by 15 basis points (from 0.47% of assets to 0.32%) between 2009 and 2018.

More information about the 403(b) market can be found in the report, “The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at ERISA 403(b) Plans, 2018.”