Why Participation Is Low in K-12 403(b) Plans

K-12 public schools often offer traditional defined benefit (DB) pension plans in addition to 403(b) plans; four out of five of K-12 403(b) plan sponsors surveyed by the LIMRA Secure Retirement Institute do so.

The survey also found six out of 10 school districts offer a 457 plan along with a 403(b) plan. Many sponsors offer both to try and increase savings rates and give participants the opportunity to save more. But, the most common plan type in the “other” category is a 401(a) plan, which is commonly used for employer contributions.

Getting employees to participate in their 403(b) plans was cited as the greatest challenge by 25% of K-12 plan sponsors (see “Boosting Plan Participation Without Auto Enrollment”). One-quarter of plan administrators think employees do not participate in their 403(b) plans because they are already covered by other retirement plans.

In addition, according to the survey, most 403(b) K-12 plans (72%) do not offer employer contributions, which could cause a drag on participation. However, only 2% of employers cited this as an explanation for low participation rates.

Twenty-two percent of employers cite employees not being able to afford to save more as the primary reason employees don’t participate in their plans. However, LIMRA notes that consumers often cite affordability as a top reason for not saving for retirement, so this may be more of a factor than employers realize.

Other reasons K-12 employers cited for low 403(b) plan participation rates include employees underestimate the cost of retirement (18%), lack of awareness or understanding of the plan (15%) and employees are saving elsewhere (7%).

Twenty-seven percent of K-12 403(b) plan sponsors surveyed by LIMRA cited staying compliant with or understanding the changing regulatory environment as their greatest challenge, and 23% indicated it was their second greatest challenge.

Smaller plans (less than $5 million in assets) are more likely to be concerned about staying compliant or understanding the changing regulatory environment (77% selected this as a top 403(b) plan challenge). Being smaller, these plans might have a more limited HR staff and rely more heavily on vendors for assistance.

Over 55% of schools agree that employee retirement readiness is an important measure of their retirement benefit success. Six in 10 districts/schools believe their employees will have to work longer to have enough money to retire, and nearly half are concerned about the impact of an older workforce on future benefit costs.

Nearly 60% of schools are interested in working with plan providers to come up with innovative ways to help their employees prepare for retirement. Schools that work more with advisers were more likely to express interest in new solutions (88%), and schools with a single provider are more likely to show interest in working toward new solutions, than are schools with multiple providers.

Only 33% of school districts themselves are looking for new ways to improve employee retirement readiness, indicating that schools are more likely to seek innovative strategies with the help of providers.

The LIMRA Secure Retirement Institute survey was fielded in November and December 2014, and received 124 responses from the Association of School Business Officials (ASBO) membership, Agile distribution list (Agile is an education data vendor), and PLANSPONSOR’s (b)lines newsletter recipients.