Compliance April 23, 2021

Congressman Again Pushes for Expanding Investment Options in 403(b)s

A lack of access to the same investment types allowed in other DC plans means 403(b) plan participants are missing out on increased retirement savings, industry sources say.

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Congressman Jimmy Panetta, D-California, has re-introduced the Public Service Retirement Fairness Act, a bill that would allow collective investment trusts (CITs) as investment options in 403(b) plans.

The bill was first introduced last March and was referred to the House Committee on Financial Services and the House Committee on Ways and Means, but nothing has come of it since.

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CITs are collectively managed investment vehicles that typically have lower costs and more flexibility than annuity contracts and mutual funds—the only types of investments allowed in 403(b) plans. With excessive fee lawsuits extending to the 403(b) space and account assets growing larger with time, 403(b) plan sponsors have been inquiring about offering CITs on their plan menu.

The Public Service Retirement Fairness Act seeks to amend Internal Revenue Code (IRC) Section 403(b) to permit inclusion of CITs as investment vehicles in 403(b) retirement plans. The bill also calls for corresponding changes to the Investment Company Act of 1940, the Securities Act of 1933 and the Securities Exchange Act of 1934, as well as adjustment to related rules and regulations covering CITs and separate accounts and regulations that otherwise restrict investments for CITs.

ICMA-RC, now MissionSquare Retirement, has expressed support for previously introduced bills that would allow CITs in 403(b)s and has been involved in its own advocacy efforts. It has also made an attempt to get a private letter ruling from the IRS about offering CITs in 403(b) plans as underlying investments in annuity contracts or other investment vehicles.

In a recent conversation with John James, managing director and head of Vanguard Institutional Investor Group (IIG), he reiterated Vanguard’s support for the legislation. He said the firm’s own calculations show that 403(b) plan participants could save as much as $250 million annually by investing in CITs.

With the reintroduction of Panetta’s legislation, the National Association of Government Defined Contribution Administrators (NAGDCA) announced its support for the bill. “Lack of access to the same breadth of investment structures long available to other types of public sector DC [defined contribution] plans is costing 403(b) plan participants—which include the nation’s 10 million teachers—potentially thousands of dollars in retirement savings due to higher investment expenses and reduced returns,” says NAGDCA Executive Director Matt Petersen.

Data and Research April 23, 2021

Higher Education Plan Sponsors Seeing More Demand for Participant Investment Help

Plan sponsors can respond by simplifying fund menus and providing access to professional help; many are already using managed accounts.

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A study on higher education retirement plans from Voya found 43% of plan sponsors say motivating employees to save adequately and invest wisely are top challenges to helping their employees prepare for retirement.

Interestingly, a separate study from Transamerica found more than half (59%) of higher education institutions view motivating faculty and staff to save adequately for retirement as their greatest challenge in managing their retirement plan. Forty-seven percent said it was helping participants invest wisely.

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According to the Transamerica survey, nearly three out of five institutions (59%) say they’ve seen increased demand for investment and in-plan retirement income opportunities, and 26% report an increased need for access to professionally managed accounts due to the effects of COVID-19.

“I think the COVID-19 pandemic further highlighted the main issues that have historically concerned plan sponsors about helping employees achieve optimal retirement outcomes,” says Wendy Daniels, vice president, not-for-profit practice leader for Transamerica.

Plan sponsors should make sure their fund lineups are relevant for faculty and staff, including by having options that are appropriate for the savings phase and the withdrawal phase, Daniels suggests. “There should be an appropriate mix of options that include TDFs [target-date funds], and the investment lineup should be simplified.”

Daniels says investment decisions are challenging for participants, so making their choices easier is key to helping them invest wisely. She adds that this is where managed accounts can help.

“Working with an adviser in a managed account can help them set an appropriate contribution rate, invest appropriately, set retirement income goals and aggregate any outside accounts into their retirement strategy,” Daniels says.

The Voya study found 55% of higher education institutions offer managed accounts within their retirement plans.

As for in-plan retirement income opportunities, higher education plan sponsors have tended to gravitate more toward annuities to solve this need, Daniels says.

Brodie Wood, senior vice president and national practice leader for education markets at Voya Financial, says participants in higher education retirement plans have more interest in investment advice, but Voya’s data shows that’s part of an overall interest in financial wellness.

There is a need to remove obstacles that get in the way of saving more and investing wisely, Wood says. “The No. 1 challenge is getting people to save more,” he adds. “I’m optimistic because in the last year we’ve seen student loan and emergency savings solutions starting to address what I see as big obstacles.”

The Voya white paper about its study says, “Participant education, delivered in the right way by the right people, can inspire higher savings rates and help improve overall plan health. A holistic participant education offering financial wellness can help participants see the value of their retirement plan, encourage action and inspire them to commit to a long-term retirement savings plan.”

The Voya study also found that as a result of COVID-19, many higher education plan sponsors expect more participant interest in digital and virtual educational offerings. But Wood says it’s a challenge to address the needs of more disadvantaged groups; they might be lower-paid and not have internet access. He says the objective of giving advice and guidance to participants is greater than in the past, in part because of the financial effects of the COVID-19 pandemic. But how to provide advice and guidance is a quandary.

“Many participants are more comfortable with getting advice online versus talking to someone,” Wood says. “However, disadvantaged groups and older workers need that face-to-face [interaction]. They are the ones who are probably most at risk if they have to go online to get guidance.

“There’s a difference between advice someone gets in-person and what they get from a tool that spits out recommendations,” Wood adds.

He noted that health care institutions and higher education institutions traditionally had on-site consultants or advisers. But many higher education campuses closed their in-person activities because of COVID-19, and advisers shifted to virtual meetings.

“The demand for on-site representatives is still there, and as we come out of the pandemic, some of that will shift back, but participants will be more comfortable with virtual meetings,” Wood says.

According to the Voya study, smaller institutions report higher rates of on-site representatives—either through their plan provider or a third party.

Wood also says some investment choices higher education institutions use in their retirement plan fund lineup, such as those that provide guaranteed retirement income, are complex to understand.

“There’s a need for one-on-one guidance to understand these investment solutions and whether they’re right for a participant,” he says. “That is a key way to motivate employees to keep saving and invest wisely for certain demographics.”

Having an in-person representative may come at a cost, but the more paternalistic the plan sponsor, the more likely it is to make the investment, which will help disadvantaged segments of employees, Wood says. The more tech-savvy participants will be comfortable with online advice.

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