Who’s Watching the Door? How Improving 403(b) Administrative Oversight Can Improve Educators’ Retirement Outcomes
This paper examines how controlling vendor access to public K-12 supplemental 403(b) plans improves teacher retirement outcomes by controlling the number of providers, products, investment options, and the level of fees that teachers pay on their retirement saving accounts. We sort retirement plan systems into two administrative levels (state or local school district) and two degrees of management and oversight (open access or controlled access). Open access management typically allows “any willing provider” access to plan participants. Controlled access management limits the number of providers in the plan, typically through a competitive bidding process. Examining data in four state-level systems, we find that states using the open access model generally have a 403(b) plan with a large number of providers and investment options, and a broad range of relatively high fees. States using the controlled access model have a relatively small number of providers and investment products, and relatively low overall fees. We find participants in open access states face significantly higher asset-based fees and significantly higher variability in fees relative to teachers controlled access states. Teachers in open access states have a higher likelihood of paying loads (either front-end or back-end) and being subject to surrender charges. We perform simulations that show that over a full-working career, a teacher in a controlled access state can accumulate between $60,000 and $100,000 more in real (constant 2010 dollars) retirement wealth. On an annuity basis, this equals about $4,000 in annual real retirement income, accounting for an additional 7 percent income replacement rate of the final year’s salary. Assuming a standard 4 percent systematic withdrawal rule, a teacher in a controlled access state retiring at age 65 will generate about $65,000 more in real retirement income and have about $80,000 more in real retirement assets remaining at age 85.