Pennsylvania Law Requires Multiple Providers for School District 403(b)s

An act inserted into Pennsylvania’s Public School Employees’ Retirement Code requires school districts, beginning July 1, 2019, to have a minimum of four separate “financial institutions or pension management organizations” for each 403(b) plan sponsored.

The term “financial institutions or pension management organization” is intended to include providers of an annuity contract or custodial account, according to a Pennsylvania government website. 

The Retirement Code also requires the Pennsylvania State Employees Retirement System (PSERS) to select three “providers of investment options” for the School Employees’ Defined Contribution Plan, effective July 1, 2019. If one or more of the providers selected by PSERS for the DC plan is also a provider that has a contract with a school district for the school district’s 403(b) plan, then the school district is required to seek additional providers to ensure that the school district has four providers plus the provider that was selected to be a provider for the DC plan.  In other words, the school district must maintain four providers that are not also a provider for the DC plan.

For example, if PSERS offers providers A, B and C for the DC plan, and employer 1 uses provider C, it must choose four additional providers other than A, B or C for its plan.

K-12 public school 403(b) plans haven’t changed as much as plans in other 403(b) market segments—mostly keeping the multiple-provider model—but efforts have been made to encourage them to move to a single-provider model.

Some players in the K-12 403(b) plan marketplace say the traditional model—in which plan participants have individual relationships with advisers and the majority, if not all, of their retirement savings is in individual annuity contracts or custodial accounts—needs a revamp. Among their arguments, this camp says the traditional model leaves plan sponsors with an unworkable number of retirement plan providers serving the same plan. Participants also have too much choice and responsibility for investments and providers, and investment costs to participants are higher.

But there are others who argue that elements of the traditional model work best for K-12 school districts and their employees. They are not advocating for maintaining the status quo exclusively, but say plan sponsors can find a balance between old and new, and should look at all options to determine what is best for plan participants.