Advisers see new life for 403(b) market

Revamped rules could benefit current players

Jul 14, 2008 @ 12:01 am

By Lisa Shidler

Financial advisers who specialize in 403(b) plans are optimistic ahead of regulations that go into effect Jan. 1

They think that the rules, which will make 403(b) plans more like 401(k) plans by requiring sponsors to maintain written plan documents, will help them garner more business from the non-profit schools, religious entities and health care providers that offer the plans.

Since the rules — issued by the Department of the Treasury and the Internal Revenue Service — entail more responsibilities for employers, non-profits are working to cut costs by paring down the number of vendors with which they work. About 85% of K-12 school districts have been cutting back to about three to five providers, said Bruce Corcoran, senior vice president for national markets and education for AIG Retirement, which is the marketing name for AIG Valic, a Houston subsidiary of New York-based American International Group Inc.

And 15% have gone down to just one provider, he said.

This concentration will benefit players who understand the market and have made a commitment to serving non-profits, advisers believe.


Jon Clark is one such adviser.

When he joined Financial En-hancement Group LLC in Anderson, Ind., in 2005, he thought he would be in a great position to sell these plans because he had been a teacher for 12 years.

But it proved to be harder than Mr. Clark had imagined, because the market was so fragmented. Now he thinks he has a better chance to capture assets.

"The best way of getting your foot in the door is to know all the rules and regulations," said Mr. Clark, whose firm manages $200 million in assets. "There are still many reps out there who don't understand the new rules."

Assets in 403(b) plans at the end of 2007 totaled $727 billion, according to Boston-based Cerulli Associates Inc., which predicted that assets will grow to more than $1 trillion in 2010.

There are tremendous opportunities for advisers, but they'll have to get up to speed in short order, said Mr. Clark.

"I've met with multiple administrators and teachers all summer," he said. "It's not easy. Anyone who isn't [involved in] 403(b) plans right now will have an extremely hard time walking into the doors of the school systems."

But experienced advisers should not have to make so many changes, said David Hinderstein, a White Plains, N.Y.-based adviser with National Retirement Partners Inc. of San Juan Capistrano, Calif. He works with larger non-profit employers such as universities and manages about $1 billion in assets.

"If [a novice] goes up against a seasoned 403(b) provider, he'll get smoked," Mr. Hinderstein said.

A significant problem is that school districts are avoiding coming to grips with the new requirements for written plan documents, said Rob Thomas, president and founder of Springfield, Mass.-based Social(k), which is working in collaboration with ExpertPlan Inc., an East Windsor, N.J.-based defined contribution retirement plan provider.

"Most of them are just too busy," he said. "It's a back burner item that people don't want to pay attention to."

But new and improved 403(b) plans are emerging, and many non-profits are taking note of them. For instance, AIG Retirement said that requests for proposals are up 700% from a year ago. Meanwhile, The Principal Financial Group Inc. of Des Moines, Iowa, said its 403(b) business was up 89% in the first quarter of 2008, compared with the same period a year ago. There's been tremendous growth in prospective 403(b) business, said Paul Fromm, marketing director for the non-profit division of Principal.


While school districts can be daunting to work with, small non-profit companies also pose challenges, said Ian McLeod, an investment adviser with The Social Equity Group Inc. in Berkeley, Calif., which manages $65 million in assets.

"The main problem has been if it's a small non-profit, then administrative overhead changes are dramatic, and they've got more costs and more work, and that's the big problem," Mr. McLeod said.

Working with health care practices can be easier than school -districts, said Eric Endress, an investment adviser with Cbiz Financial Solutions Inc. in Cleveland, which manages $4 billion in assets.

"School districts are hard to get, because of the politics," he said. "Everyone wants a choice. The flip side is that when you pool everyone's assets and go to one plan, there's better pricing."

The 403(b) activity in the last seven months has seen a huge uptick, said Chris Cumming, senior vice president at Great-West Retirement Services of Greenwood Village, Colo.

However, his company is reluctant to try to enter districts where they don't have any plans.

"We're going to put our efforts and our time where we've already got plans," he said. "I don't think any vendor can say, 'I have no ground and am going to come here.'"

E-mail Lisa Shidler at


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