NEW YORK - Brokers and financial planners who sell to retirement plans for non-profit institutions such as public schools could see their livelihoods wiped out by coming changes in the tax code that would make it more difficult to service 403(b) plans.
That dire outlook for the 403(b) marketplace is the assessment of some in the industry, including Art Grant, president and chief executive of Cadaret Grant & Co. Inc., an independent broker-dealer based in Syracuse, N.Y.
Mr. Grant said that about half
a dozen of the 900 or so register-
ed representatives affiliated with his firm have books of business solely dedicated to the 403(b) marketplace.
Those reps' time in that market is running out, he said. "This is going to devastate that business," Mr. Grant said, referring to changes in the tax code originally scheduled for next year but pushed back to January 2007.
Need for adjustment
"I don't think there's any resistance" in Washington to the proposed changes, he said. "I think we're going to have to adjust now."
"I think what it's going to do is - more than inhibit - almost eliminate that as a marketplace for our brokers, the ones who specialize in that."
Mr. Grant said that maybe 1% or 2% of Cadaret Grant's gross revenue - $87 million in 2004 - came from those sales. "And for people for whom that's their core business, that's significant."
The proposed changes call for operating 403(b) plans more like 401(k) plans. Up to now, 403(b) plan design has been fairly simple: The non-profit employer selects a number of vendors, commonly up to 10, to solicit its employees to open 403(b) accounts. After that, the employer only has to facilitate payroll deductions.
Some registered representatives and financial planners who sell and service 403(b) plans have been worried about the change in the tax code (InvestmentNews, Jan. 24).
But recently, heavyweights including the Securities Industry Association of Washington and New York have weighed in on the argument.
In June, the SIA said it was greatly concerned with two changes: the requirement for each retirement plan to have a "plan document" and "transfer arrangements."
The requirement for a plan document might "cause employers to close 403(b) arrangements using the 'salary deferral only' structure, especially the great many used by public and private educational employees," wrote Gregory J. Reynders, chairman of the SIA retirement and savings committee, in a June letter to the Internal Revenue Service.
Plan documents "can greatly increase the cost of these structures," he wrote.
Transfer arrangements from one 403(b) account or annuity to another also are essential to the business as it now stands, Mr. Reynders wrote.
"This grants employees great freedom of choice with regard
to investment selection, expenses, methods of distribution and vendor selection. The proposed regulations take away these benefits
by requiring transfers to be made under the control of a plan,
which, in turn, is controlled by an employer."
Not every broker-dealer executive whose reps work in the 403(b) market agrees with Mr. Grant.
"There are going to be changes. The question is, the degree," said Richard Ford, senior vice president and chief marketing officer for PlanMember Securities Corp. of Carpinteria, Calif., which has affiliations with more than 400 registered representatives.
Still, he said, larger insurance companies "think it's a done deal." The new regulations, Mr. Ford said, could give the edge to third-party administrators affiliated with large companies that would do the payroll processing and paperwork, thus pushing aside
an independent rep or financial planner.
Mr. Grant believes this change is very serious, particularly as much of the payoff for brokers occurs when a client transfers the account.
"A lot of people who serviced that marketplace didn't make so much money from the periodic contributions," he said.
"They made money from the time somebody retires or transfers school districts or for some other reason transfers a 403(b) account and they make money from the transfer" into the new investment, Mr. Grant said.
Change of plans
Retirement plans at non-profit institutions also will wind up operating a lot like 401(k)s, with large companies reaping the benefit, Mr. Grant said.
"School districts will adopt a plan document, and they will sign up with a plan sponsor, and they may need a [tax-sheltered annuity], or they may depend on Fidelity or Putnam or somebody to do their accounting for them."
Tax code changes
And the impending change in the tax code spells less freedom of choice in the market, Mr. Grant said.
"It's no longer going to be, anybody can do anything with their money," he said. "A lot of those choices are going to be eliminated, and teachers will have to do what the plan sponsor says. While it may seem that's not good for teachers, and it's not, it's certainly the way the 401(k) market works."