How 403(b) Assets Exceeded $1 Trillion

We study the data to find out what’s leading to this growth and what the future might hold.

Assets in 403(b) plans have topped $1 trillion for first time, according to the PLANSPONSOR 2021 Recordkeeping Survey. Total assets reached $1.26 trillion in 2021, a 27% jump from $992 billion in 2019.

Experts from three of the largest providers in the 403(b) marketplace talked to PLANSPONSOR about key drivers—beyond the bull market—that have helped the growth of these plans and that could help propel 403(b) plans to their next $1 trillion in assets:

• Health care’s expansion: Data from the PLANSPONSOR 403(b) Market Study, a subset of the PLANSPONSOR Recordkeeping Survey, shows that between 2014 and 2021, health care/hospital plans rose from 27% of 403(b) market assets to 34%.

“Certainly, in our not-for-profit business, the health care segment has been growing the fastest,” says Rick Mitchell, executive vice president for the tax-exempt market at Boston-based Fidelity Investments. “The health care sector is growing overall, and larger hospital systems are growing. One big trend we see is that there has been a lot of merger and acquisition [M&A] activity: Smaller hospital systems are partnering with larger hospital systems or being acquired by them, and larger systems also are bringing in academic medical centers and physicians’ groups.”

He says that as these health care organizations get bigger, they often increase their focus on employees’ financial wellness and retirement readiness, such as by adding automatic enrollment features to their plan.

• Rise in auto-enrollment: 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.  

“As we look at our clients’ 403(b) plans, our highest percentages of auto-enrollment and auto-increase features are in retirement plans in higher education,” Mitchell says.

He also notes that match costs were already embedded in many of these plans. “Retirement plans in higher education historically have had a plan design that has a significant employer contribution,” he says. “So they’ve grown up with that kind of plan design, and they’re more receptive to looking at the use of auto-features to get more participants on track for retirement.”

• Employer matches: Among 403(b) sponsors surveyed in PLANSPONSOR’s Defined Contribution Survey, 62.4% say their organization offers a matching contribution. And 88.3% of sponsors say they have not reduced, eliminated or suspended their match in response to the pandemic.

Brodie Wood, senior vice president and national practice leader at New York-based Voya Financial, says he isn’t surprised that most employers offering a 403(b) match haven’t suspended or reduced it. These employers provide a 403(b) match as part of their longer-term evolution from a defined benefit (DB) plan focus to a defined contribution (DC) plan focus, he says.

“This shift to put in place an employer match, and make their 403(b) plan their go-to retirement plan, has been the big shift for many of these employers in the past several years,” he says, adding that most aren’t going to make a rash decision that impedes the shift.

“These organizations are slow to move, as opposed to corporations, which move quickly in response to developments,” he says. “So some of their funding isn’t as quick to disappear.”

• Lower loan usage: An average of just 7.3% of 403(b) plan participants had an outstanding plan loan as of June 2020, according to PLANSPONSOR’s Defined Contribution Survey, compared with 12.4% for all responses to the survey. The low loan usage stems at least partly from plan design, as 54% of 403(b) sponsors say their plan’s participants can only have one loan open at a time.

“In the K-12 sector, many of the 403(b) plans are voluntary [i.e., supplemental savings] plans, and they might not even have loans as an option for participants,” Wood says. “They’re not looking at the 403(b) plan as a ‘piggy bank’ for participants, like some 401(k) plans do.”

• More one-on-ones: More employers with 403(b) plans facilitate one-on-one, on-site meetings with a financial planner/adviser than in the broader retirement plan universe: 66.1%, versus 51.1% for all industries surveyed by PLANSPONSOR.

Ralph Ferraro, senior vice president, retirement plan products and solutions at Radnor, Pennsylvania-based Lincoln Financial Group, sees a direct connection between one-on-one meetings and participants’ asset growth. He says 403(b) participants who have had a one-on-one meeting with a Lincoln retirement consultant and visited the group’s website within the past quarter have a 9.6% average pre-tax contribution rate, compared with a 6.2% average rate for participants who did neither.

“In the meetings, our retirement consultants can help them look at ways to increase their deferral,” he says. “And the one-on-one dialogue is great for helping participants keep saving for retirement front of mind.”

• Retirement income options: Among the 403(b) plan sponsors surveyed by PLANSPONSOR, 60.8% offer a systematic withdrawal option, compared with 44.6% of plans in all industries. And 28.6% offer in-plan, insurance-based products that guarantee monthly future income, versus 11.1% of plans in all industries.

Incorporating retirement income options “can lead to increased assets remaining in the plan when employees retire,” Ferraro says. “Having these additional options to help the participants manage their distribution phase is critical.”

Looking to the Future

What else could propel the 403(b) market’s future growth? Despite the overall advancements the plans have made, participation in 403(b)s actually declined modestly, from 74.1% in 2017 to 70.8% in June 2020 according to the Defined Contribution Survey.

Nonetheless, Fidelity continues to see participation growth for the not-for-profit clients it serves, and Mitchell says the increased use of auto-enrollment could reverse the broader participation decline in the 403(b) market. While it’s an improvement from the past, the 42% of 403(b) plans surveyed that do auto-enrollment trails the 49.1% total for all plans surveyed by PLANSPONSOR.

“The entities we’re talking about are managing in a unique environment, as a not-for-profit,” Mitchell says. That makes committing to the match expense a more complex issue for some employers, he notes.

“But I see no reason why they wouldn’t ultimately catch up with their for-profit sector counterparts,” he says. “We’re working with 403(b) plan committees to help them show their organization that it is worth investing in these programs, that there is a return on investment.” Fidelity is sharing data from other employers’ experiences that shows benefits such as higher employee retention and an increased ability for employees to retire on time, he says.

Looking ahead, the proposed federal SECURE 2.0 legislation—a reference to 2019’s Setting Every Community Up for Retirement Enhancement (SECURE) Act—includes a couple of proposals that experts say could help 403(b) assets grow. For starters, the legislation would allow 403(b) plans to use collective investment trusts (CITs). “It would provide for more flexibility in solutions for plan fiduciaries, and allow for finding the investment solution that best fits their plan and employee demographics,” Ferraro says. Using lower-fee investments such as CITs leaves more assets in participants’ accounts to keep growing, he adds.

Wood says the SECURE 2.0 proposal to allow not-for-profit employers to band together as a single 403(b) in a pooled employer plan (PEP) or multiple employer plan (MEP) could lead to 403(b) asset growth. That could especially help the smaller end of the market, he says. Plans with more than $1 billion in assets have grown from 28.5% of the overall market in 2017 to 37.9% in 2021, the Recordkeeping Survey finds.

For some not-for-profits—especially smaller employers with time-pressed staff members who find it challenging to keep up with regulatory changes and plan operations—joining an efficient 403(b) MEP or PEP could be a better solution for both participants and employers, Wood says. “Right now, you cannot sponsor a PEP within the 403(b) environment,” he says. “And we’re definitely seeing an employer interest and appetite for that.” —Judy Ward