Updated with correction
New regulations for 403(b) plans, set to go into effect Jan. 1, are spurring consolidation of plan providers in the not-for-profit market.
In the past, 403(b) plans — defined contribution plans for school districts, hospital and other not-for-profit entities — hired a bunch of vendors to provide investment, record-keeping and administrative services. But the new rules make it difficult to maintain such a large stable because they require plan executives to provide a written plan document for each provider, account for excess contributions and monitor the transfer of participants' assets among the multiple service vendors.
Among the 403(b) program sponsors that have streamlined their providers in recent months:
• The Fairfax County Public Schools, Falls Church, Va., in July hired three providers for its $400 million plan. Previously it had eight firms providing services.
• York College of Pennsylvania, York, Pa., hired one provider, TIAA-CREF, for its $80 million plan. It previously had three.
• The University of North Carolina System, Chapel Hill, switched to just two providers Jan. 1 for its $1 billion plan, after having 20 providers.
“Consolidation is on the horizon,” said Tom Modestino, senior analyst at researcher Cerulli Associates, Boston. “The legislation is so new that a lot of folks might be just waking up to what impact these rules might have, but it seems clear 403(b) plans will increasingly look to hire fewer providers.”
There's certainly a lot of money at stake: $612 billion in 403(b) plans as of Dec. 31, according to Gerald O'Connor, director at consulting firm Spectrem Group, Chicago.
The winners, experts agree, will likely be the firms that already have strong market share and expertise in the highly concentrated 403(b) market, and can use that scale to grab new business. As of Dec. 31, 2007, the most recent data available, the top 10 money managers in the 403(b) market accounted for a whopping 80% of the total assets, according to Cerulli Associates.
(Cerulli and Spectrem are separately planning to publish new reports on the 403(b) market later this year and next year, respectively.)
TIAA-CREF, the largest manager of 403(b) assets, had a 50% market share at year-end 2007, according to Cerulli. (Through 2008, TIAA-CREF had $321.88 billion in U.S. institutional tax-exempt internally managed 403(b) assets, according to Pensions & Investment data.)
Firms that don't have a “strong toehold” in the 403(b) market might have exited the business, or are planning to do so in light of the new rules, said Lisa Arko, a senior consultant at Watson Wyatt Worldwide Inc. in Philadelphia.
Goldman Sachs Asset Management, Northwestern Mutual Life Insurance Co. and Merrill Lynch & Co. Inc. all stopped accepting new 403(b) money after Dec. 31, Ms. Arko said. All three remain active in other defined contribution markets.
One issue, said Ms. Arko, is information sharing: Under the new regulations, vendors must share data from their platforms with the plan and other vendors; firms that don't have such an information-sharing system or structure in place must decide whether to create one.
“This is a huge change for the 403(b) market,” said Ms. Arko. “You've gone from a system where employers simply offered participants access to 403(b) providers to one where now those employers have to act like plan sponsors. It will be a work in progress for a while.”