The color palette of the 403(b) and 401(k) worlds

Contributor: Natalie Wyatt

Children learn color theory in school, where they combine primary colors to achieve a secondary color, and then create tertiary colors from those results.  Similarly, the traditionally distinct 403(b) and 401(k) industries now are spreading over into each other’s color spectrums.

The 403(b) industry began to see colors running together with the 403(b) regulation updates of January 2009.  Many exemptions it enjoyed were removed, and requirements that the 401(k) world had long been subject to were put in their place. Some of those requirements included written plan documents, aggregation of asset totals, and full Form 5500 filings with their corresponding audit requirements.

The lack of exclusion and color amalgamation continues with the current fee disclosure regulations, even though they only apply to the portion of the 403(b) industry subject to ERISA.  No exemption is offered for 403(b) plans with either the ERISA 408(b)(2) fiduciary-level or the ERISA 404(2) participant-level fee disclosure projects.  The 403(b) market’s uniqueness for historically participant-driven account and fund decisions, and multiple-vendor platforms, makes the creation of these disclosures inherently more complex than disclosures in the single-vendor, 401(k) industry.

Future color blending is on the horizon with a focus on providing 403(b)(7) plans as product offerings.  A 403(b)(7) plan invests only in mutual funds versus 403(b) plans’ annuity products combined with some mutual funds or the traditional use of pure tax sheltered annuity (TSA).  403(b)(7) plan investments operate much like the more familiar 401(k) plans, and mimic platforms already in place with 401(k) providers.

The market’s current focus on the 403(b)(7) offering also can be attributed to the 403(b) plans’ lack of exclusion from current fee disclosure regulations. Using a single-vendor platform that offers mutual funds helps clean up some of the administrative reporting complexities in a multivendor environment.  Additionally, service fees from mutual funds within the offering may be used to offset increased administrative fees experienced by 403(b) plans.

Even guaranteed income accounts have started crossing over from the 403(b) world, appearing in the 401(k) industry as a marketed solution for lifetime income and potential protection against a market downturn. These variable annuities, widely used in the 403(b) industry, provide a steady stream of income during retirement to participants, but still allow them to invest in the market.

What will the 403(b) and 401(k) plans’ color palettes look like in the end —  will they combine to one common murky hue, or close their gaps just enough to create two brilliant variations of the same color? I believe the answer may be both product-driven and regulatory, as rumblings of pension simplification are heard from the Hill. Are you seeing some clashes in the blending of these offerings, or do you welcome the change?

Brokerage services of SunGard’s wealth management businesses are provided by SunGard Institutional Brokerage Inc., Member FINRA/SIPCThis blog has been provided for information purposes only without regard to any particular user’s investment objectives, financial situation, or means, and by posting such information SunGard is not soliciting any action based upon such information.

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