If you currently work with 401(k) and profit-sharing plans, expanding the reach of your practice to serve 403(b) plans can uncover a whole new world of potential opportunities. The expertise and experience you have gained serving 401(k) plans can be fully leveraged to serve 403(b) plan sponsors and their employees.
What is a 403(b) Plan?
A 403(b) plan is a retirement plan for employees of colleges and universities, hospitals, and healthcare services organizations. 403(b) plans may also be available for employees of 501(3)(c) tax-exempt nonprofit organizations, such as churches and charitable foundations. Over the years 403(b) plans have evolved to a point where they are not all that different from 401(k) plans. Here are six similarities between them:
1. Over the course of their career, eligible employees put a portion of their earnings into an employer-sponsored plan on a tax-deferred basis; they may choose a traditional pre-tax contribution or a Roth contribution. In 2023, participants can contribute up to $22,500 in a 403(b) plan, or if they are 50 year or older, they can make additional catch-up contributions of $7,500, bringing a total contribution limit in 2023 to $30,000[1].
2. The employer may choose to make contributions to the plan on a required (money purchase), discretionary (profit-sharing) or matching basis (ERISA plans only).
3. Annual IRS deferral limits are the same for both plans, as are the age 50+ catch-up contribution limits.
4. Savings can be rolled over to another qualified retirement plan or a traditional IRA if the participant changes employers.
5. Withdrawals are subject to a 20% mandatory federal tax withholding if the participant elects to directly receive funds eligible for rollover to another employer plan or an IRA; withdrawals prior to age 59½ may be subject to a 10% early withdrawal penalty from the IRS.
6. Distribution of assets must begin no later than April 1st of the year following the year the participant reaches age 72.
Here are some other things to know if you are considering expanding your reach and serving 403(b) plans.
Prospecting for 403(b) plans
For advisors that traditionally work with 401(k) plans there are at least a few key things to keep in mind when prospecting. In the 403(b) world, you’ll be targeting and cultivating relationships with organizations and institutions, not companies.
Having a culture of community involvement and or clear philanthropic strategy can be a ticket to prospecting for 403(b) clients. For example, you might target private colleges and universities, museums, charities, cultural organizations, and professional associations. As an initial prospecting strategy, you might consider focusing on just a few key groups you are interested in or passionate about.
In cases where the decision maker (the person who chooses the advisor and other service providers) is a board or an individual member versus an owner or officer. You should be aware that working with boards can be a different process to influence the buying decision. You can expect the organizational and institutional cultures, infrastructures and other aspects of doing business to be very different from the traditional companies in the corporate retirement plan market you currently serve. Prospective clients, especially in education, may also have “multi-provider” 403(b) plans solutions—these are more complicated. Advisors will want to know if an existing plan is with a single provider or recordkeeper.
403(b) plans are underserved
Only 57.7%[2] of tax-exempt organizations work with a financial professional. This is an opportunity for you to offer the other 42.3% the same value and professional services that you provide to your current 401(k) plan sponsor clients. 403(b) plan sponsors are no different—most of them are focused on their organization’s mission and are not experts when it comes to things like:
- Managing fiduciary responsibilities and plan governance
- Determining reasonable plan fees and expenses
- Developing and implementing an investment policy statement as well as an education policy statement
- Maintaining an ongoing, effective employee communication and education strategy
- Evaluating employee financial wellness needs and determining a solution
- Measuring plan success in terms of positive retirement outcomes and retirement readiness of employees
These are likely not much different than the current experience with your 401(k) clients. For example, retirement income solutions and financial wellness have moved up significantly in importance when it comes to plan priorities among 403(b) plan sponsors, according to a recent Plan Sponsor Council of America (PSCA) survey. This mirrors what is happening in the 401(k) space.
According to the survey, the top 10 403(b) plan priorities for 2022 compared to 2020 were:
• Increasing participation rates: 21.7% in 2020; 22.5% in 2022
• Plan compliance/reducing fiduciary liability: 31.4% in 2020; 21.7% in 2022
• Providing retirement income options for participants: 6.2% in 2020; 13.0% in 2022
• Providing financial wellness tools: 8.5% in 2020; 12.3% in 2022
• Increasing deferral rates: 12.4% in 2020; 10.1% in 2022
• Enhancing participant education: N/A in 2020; 8.0% in 2022
• Reducing plan cost: 7.8% in 2020; 5.1% in 2022
• Changing the investment lineup: 6.2% in 2020; 2.2% in 2022
• Conducting and advisor or consultant search: 1.9% in 2020; 1.4% in 2022
• Conducting a recordkeeper search: 0.8% in 2020; 1.4% in 2022
ERISA vs. Non-ERISA 403(b) plans
An organization or institution’s ERISA status is something to consider as you develop your prospecting and marketing strategy. A 403(b) plan that is an ERISA plan is subject to meeting the requirements related to specific items, such as: Form 5500 filings, Summary Plan Descriptions, Summary Annual Reports, ERISA bonding, fee disclosures, fiduciary responsibility and nondiscrimination requirements. 403(b) plans sponsored by 501(c)(3) organizations, such as tax-exempt hospitals and charitable or community service organizations (other than a religious organization) are generally subject to ERISA, but may be exempt if they satisfy certain requirements. However, public education institutions and certain governmental employers, along with entities like district or county hospitals, or certain charter schools are automatically exempt from ERISA requirements.
Expanding your reach by working with 403(b) plans is an excellent way to build relationships and trust in new but familiar territory. Leveraging your expertise in the 401(k) space and gaining unique business opportunities in new sectors can really open your business up for growth in the 403(b) market for years to come.
SEE ALSO:
• How SECURE 2.0 Will Benefit Public Sector Workers
• A Boon for the 403b: IRS Expands Tax-Favored Approval Process
• Nonprofits Enhance 403(b) Contributions, Financial Wellness Post-COVID
[1] https://tax.thomsonreuters.com/news/2023-contribution-limits-401k-increases-to-22500-ira-to-6500/#:~:text=For%202023%2C%20the%20amount%20an,increases%20to%20%247%2C500%20from%20%246%2C500.
[2] Plan Sponsor Council of America (PSCA) 2021 403(b) Plan Survey, table 126.
Joel Mee is the senior director of retirement plan sales at Standard Retirement Services and a registered representative of StanCorp Equities, Inc., a registered broker-dealer.
