By Kristen McNamara
A Dow Jones Newswires Column
NEW YORK -(Dow Jones)- Pending rule changes are shaking up the market for 403( b) plans.
Beginning in 2009, the Internal Revenue Service will require employers to take a more active role in monitoring and administering 403(b)s, the retirement- savings plans for employees of educational institutions and certain nonprofit groups. The changes are meant to provide more centralized oversight and accountability.
Currently, many teachers work directly with representatives from insurance and investment companies that offer 403(b) plans. Dozens of vendors may work with teachers within one school district.
Under the new regulations, employers will offer investment products from a limited number of companies. A higher concentration of employees working with fewer providers is expected to push fees down. It also means some vendors, and their sales representatives, will no longer have direct access to employees.
School districts will be among those most affected by the changes, and many will be scrambling this summer to prepare for their new responsibilities. Many universities, hospitals and large nonprofits already comply with the changing rules.
Amid the new landscape, some financial advisors and financial-services companies plan to expand, or establish, their presence in the 403(b) market. Others, unable or unwilling to comply with the greater administrative responsibilities, are expected to exit the business.
"We see a lot of consolidation happening at the plan-provider level," says D.J. Lucey, an analyst for Cerulli. "The large players are seeing a windfall opportunity here, and some ancillary players may have to rethink whether this is a business for them to be in."
Similarly, financial advisors experienced in working with 403(b) plan participants could pick up business left by departing colleagues, Lucey says.
Consulting firm Spectrem Group says 403(b) plans held $692 billion in assets at the end of 2007. The firm projects an average growth rate of 9% per year for the next five years.
American International Group Inc.'s (AIG) retirement business can manage 403( b) plans for employers and help them comply with the new requirements, says Greg Garvin, executive vice president of independent distribution at AIG Retirement. He oversees AIG's recent initiative to sell retirement products through independent financial advisors, rather than solely through AIG employees.
AIG is contacting school districts - those it currently works with and those it doesn't - to offer its compliance and administration services, Garvin says.
AIG is also positioning itself as a partner to companies that would like their investment products to be included among the offerings for 403(b) plan participants, and to financial advisors who would like access to the retirement plan participants. Advisors, through their affiliation with AIG, could, for example, host educational sessions for employees.
Financial advisors who work with employers may get to know their employees, who may then hire the advisor to provide advice on their investment portfolios.
TIAA-CREF, the nonprofit 403(b) behemoth that serves colleges and universities, also offers administrative and compliance services and investment products. It's focused on helping its existing clients understand the new 403(b) regulations and their responsibilities, says Angie Kyle, vice president of pension product management.
TIAA-CREF has also been inundated with SOS calls from schools and organizations with which it doesn't work.
"We are certainly in a growth mode," Kyle says.
AIG and TIAA-CREF and other plan providers are paid through fees from the investment products they offer to retirement plan participants.
Scott Dauenhauer, a financial planner in Laguna Hills, Calif., who works with teachers and has co-authored a book on 403(b)s, says conflicts exist when a company providing investment products also administers the retirement plan. That's partly because there's no objective entity helping employers compare options and analyze costs, he says.
Some nonprofits and school districts hire consultants and attorneys with 403( b) expertise to help them explore their options.
Financial advisors who want to work with 403(b) plan participants will need to be experts on the new regulations and able to help investors with a range of financial matters. They can no longer simply enroll employees in retirement plans, Dauenhauer says.
"The ones who stay and know their stuff, they'll be able to pick up all the business left behind by the people who probably shouldn't have been in the business in the first place," he says.
John McAvoy, a certified financial planner in Needham, Mass., helps companies vet 401(k) plan providers. He currently does a small amount of 403(b) work, but sees opportunities to expand into that market.
He says he's contacting school districts now to offer his services. These services include requesting proposals from plan providers, helping districts analyze their options and providing education for employees.
Austin Frye, a certified financial planner in Aventura, Fla., has been doing pension consulting work for three decades, primarily for corporate 401(k) plans. He hasn't done much 403(b) work, but he sees new opportunities to work with hospitals and charitable organizations.
Frye says a large nonprofit group called him seeking help preparing for the changing 403(b) regulations. Frye is scheduled to make a presentation to the organization's board of directors, outlining its current plan and the associated costs and strategies for dealing with the new regulations.
Dan Otter, a former teacher who runs a 403(b) Web site and has written books aimed at teachers, is creating a directory of fee-only certified financial planners who understand 403(b)s and are able to provide comprehensive advice to investors with these retirement plans. Otter says he's heard from more than 100 advisors who want to be included in the directory, but many don't meet the requirements.
"The 403(b) was considered more an arrangement than a plan," Otter says. "As the light gets shined on this, I think you're going to get some serious change."
(Kristen McNamara writes about business issues facing financial advisors.)
-By Kristen McNamara, Dow Jones Newswires; 201-938-5392; kristen.mcnamara@ dowjones.com
