Pennsylvania law requires multiple record keepers for 403(b), 457 plans

Advisers think the law, which goes into effect July 1, will result in higher costs for investors

Jun 10, 2019 @ 2:23 pm

By Greg Iacurci

A new law in Pennsylvania will require school districts sponsoring certain retirement plans to use at least four service providers, which advisers say runs counter to best practices and will perpetuate an environment of higher record-keeping and investment-management fees.

Beginning July 1, school districts will need to have a minimum of four "financial institutions or pension management organizations" (i.e., record keepers) for 403(b) and 457 plans, which are defined-contribution plans for nonprofit and public-sector entities.

Joshua Schwartz, president of Retirement Plan Advisors, said the requirement effectively precludes school districts from consolidating retirement assets with a single provider to gain more favorable pricing due to economies of scale.

"Somebody convinced lawmakers to pass a law that makes retirement plans more expensive for teachers," Mr. Schwartz said. "You wouldn't mandate a school district to have to buy their school buses from four different companies."

Jennifer Kocher, spokeswoman for Jake Corman, a Republican state senator who sponsored the legislation, said the provision around multiple retirement-plan vendors was meant for diversification and is a fairly routine practice for the state.

"We don't just pick one company for one thing," Ms. Kocher said. "We require different bids and different options."

403(b) and 457 plans are a much smaller subset of the DC-plan marketplace than 401(k)s. They each hold $900 billion in assets, while 401(k) plans hold $5.2 trillion, according to the Investment Company Institute.

401(k) plans have evolved into a centralized vehicle in which one firm acts as record keeper for the retirement plan, often providing access to multiple investment options offered by several different fund families. Plan sponsors have a fiduciary responsibility under the Employee Retirement Income Security Act of 1974 to prudently manage the plan on behalf of plan participants.

However, 457 plans and the majority of 403(b) plans aren't covered by ERISA, meaning plan sponsors aren't beholden to the same fiduciary standards. These plans, especially those of school districts for kindergarten through 12th grade, are largely decentralized structures in which there's minimal oversight and multiple record keepers that offer their proprietary annuities and mutual funds, advisers said.

As a result, there could be dozens of record keepers for any given district. California has a law on the books that allows 403(b) plan participants to buy annuities from any provider of their choice and prevents school districts from soliciting competitive bids from 403(b) vendors, said Dan Otter, founder of 403bWise, a website that provides information for 403(b) plan participants. In Redlands, Calif., where Mr. Otter lives, the school district has 45 vendors, he said.

The decentralized structure makes data on the plans difficult to come by, but a 2010 report published by the TIAA-CREF Institute shows the sort of pricing disparity that occurs among school districts that don't try to limit the number of providers. In California and Texas, two "open-access" states, the average asset-based fee was 211 basis points and 171 basis points, respectively. By contrast, the average in Iowa and Arizona, two "controlled-access" states that use a competitive bidding process to whittle down providers, was 87 bps and 80 bps, respectively.

Many of the 403(b) lawsuits filed since August 2016, which have targeted universities for allegedly excessive retirement-plan fees, claim the use of multiple record keepers contributes to the problem.

Seeing the cost benefits, some plan sponsors have tried to consolidate their providers, advisers said. However, some state laws — like the one going into effect in Pennsylvania — prevent that from happening fully.

Mr. Otter said he's heard that Pennsylvania school districts that previously consolidated their vendors are now "scrambling" to add vendors to comply with the new law.

"We think these vendors see the writing on the wall," said Mr. Otter, speaking of the trend toward vendor consolidation and lower-cost investing. "I think this is market protection."


What do you think?

View comments

Upcoming event

Sep 10


Denver Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched


Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.


Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.

Latest news & opinion

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime

4 strategies for Roth conversions

There's never been a better time to do a Roth conversion, and here are several ways to go about it.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print