Using a strategy that has been applied to buying anything from textbooks to furniture to IT services, some school districts and other educational institutions are collaborating to get better deals for their defined contribution plans.
They're creating consortia, a move they say can cut costs, simplify administration and improve professional management of 403(b) and 457 plans.
“We wanted to get better pricing for 403(b) products and we wanted more accountability from providers,” said Mike Hagerty, co-chairman of the Michigan Retirement Investment Consortium, a Grand Rapids-based group of 244 state school districts and four community colleges. Combined, they have $900 million in 403(b) assets.
“When you look at public education, group buying power is tried and true,” said Don Harris, senior vice president for national education markets at VALIC, Houston. “But in the retirement space, what pushed people into action were the IRS regulations. Financial pressures and budgeting issues played into this, too.”
Mr. Harris was referring to IRS regulations that went into effect in 2009 and early this year. The rules require sponsors of 403(b) plans to take a greater role in making sure plans meet IRS guidelines for contributions, distributions and participant eligibility. That includes creating a formal plan document and establishing procedures for “control and responsibility” of the plans.
“School districts had the responsibility a long time ago, but with the IRS regulations, they knew they had a higher degree of responsibility,” said Stephen R. Banks, chief administrative officer and co-founder of TSA Consulting Group Inc., Fort Walton Beach, Fla., which provides administrative and consulting services for consortia in Michigan and Florida.
“The school districts need to reduce the number of vendors, create economies of scale and have fewer moving parts,” VALIC's Mr. Harris said.
The new IRS rules also have prompted many 403(b) plan sponsors to dramatically reduce the number of service providers (Pensions & Investments, Sept. 21, 2009). The consortia are contributing to the consolidation.
When small districts create big consortia, their bulked-up buying power can provide greater business opportunities for large providers. For example, VALIC recently became the sole provider of bundled services for a group of 65 school districts in the St. Louis metropolitan area. TIAA-CREF, New York, recently was chosen sole provider of bundled services for soon-to-be launched Arizona 403(b) and 457(b) plans being made available to 592 public employers, including 240 public school districts.
And if they can't be the sole provider, major players are often among a handful of core providers for consortia-inspired 403(b) plans. VALIC is one of several providers for a consortium of Florida school districts as well as for education consortia in Michigan and Iowa. TIAA-CREF is a provider in the Iowa consortium.