It’s not very often an opportunity comes around where a financial advisor can make a tremendous difference in the lives of clients in need and add significant AUM to their book of business.
The projected explosive growth of jobs in the healthcare and education sectors presents such a large and potentially lucrative opportunity, especially for advisors who are positioned to help these workers plan for retirement and manage their portfolios through their workplace 403(b) plans.
Employment growth for both sectors between now and 2024 is projected to run well above the national average, according to recent estimates from the U.S. Bureau of Labor Statistics (BLS). Healthcare jobs are expected to skyrocket in the coming decade—the BLS notes that 1 in 4 new jobs created between now and 2024 will be healthcare-related, and 7 out of the top 10 fastest growing occupations are in the healthcare sector.
For this very reason, the growth of the retirement advice business for workers in education, healthcare and non-profit institutions has attracted the interest of asset managers, plan providers and investment advisors. Opportunities in the 403(b) market may be different now than they were more than 20 years ago, but there remains great potential for advisors who are willing to focus on this market and offer a solution that participants find valuable–such as portfolio and risk management.
The Growth of the 403(b) Market
The 403(b) market has come a long way in a short time. Total assets have grown from $357 billion in 1996 to nearly $1 trillion in 2017, according to the Investment Company Institute. Hospital and healthcare workers comprised the largest percentage of 403(b) participants (47%), as reported in a 2013 survey. But who held most of the assets? In 2013, most of the 403(b) money belonged to teachers and other employees in the education field (49%).
How did the 403(b) market get to where it is today? A look at the history of the 403(b) tells the story of its development.
403(b) plans predate 401(k)s by over 20 years. In 1958, Congress passed the law that gave the IRS a green light to create tax-deferred savings accounts for employees at select non-profit organizations. (In comparison, 401(k) plans would not be launched until the early 1980s.) Three years after the 1958 law, eligibility for 403(b) plans was extended to workers in public schools and colleges.
Annuities were the primary savings and investment vehicles in the early years of the 403(b) plan. Even before section 403(b) entered the Internal Revenue Code, annuities were used commonly by certain workers as a tax shelter to defer income–and likewise their tax liability. In fact, the impetus for the law creating 403(b) plans was to cap how much income workers could stash out of the IRS’s reach in tax-deferred annuity accounts. 403(b)s weren’t meant to help people save for retirement; they were meant to help the government capture tax revenue they had not been collecting.
The legacy of annuities as the primary 403(b) investment vehicle persists even today–you still see 403(b) plans referred to as “tax-sheltered annuities” or TSAs, leftover language from the earliest marketing efforts.
The Wild West Years
The market changed in 1974 when mutual funds were permitted for inclusion in 403(b) investment lineups. Mutual funds offered 403(b) participants diversified investment options, without the high sales and administrative fees common with annuities. By 2013, 403(b) assets were split almost evenly between mutual funds and annuities, according to 403(b) filings in BrightScope’s defined contribution plan database.
Though 403(b) plans shared many similarities with their 401(k) brethren, the marketplace was much different for 403(b) providers and participants. For many years, it seemed like the Wild West–any 403(b) plan provider could send their sales reps into a school or a hospital, with minimal oversight from the school district or healthcare system. Greedy salespeople sold inflexible and high cost annuities with little explanation to participants as to what they were buying or what fees they would pay.
Regulations Rock the 403(b) World
New regulations took effect in 2008 changing the 403(b) landscape. School districts, hospitals and any non-profit organization that wanted to sponsor 403(b) benefits now had to draft and comply with administrative plans. Much like the plan documents required of 401(k) sponsors, these written rules would define eligibility requirements, contribution limits, investment selection and more for 403(b) plan participants.
The regulations transformed the 403(b) market to a structure that more closely resembled 401(k) plans. The new rules also would shrink the number of plan providers competing for 403(b) assets. There were fewer sharks in the water, too, not as many commission-hungry sales representatives chasing down doctors, nurses and teachers for their 403(b) contributions.
The 403(b) market became more efficient with these changes, but participants also saw fewer investment options directly on the plan side. However, many large plans opened brokerage windows for participants, giving them access to as many as 3,500 mutual funds to choose from. Of course, so many choices has its advantages and disadvantages. A wide range of investment choices is great, but with all these choices how do participants decide?
A Prime Opportunity Financial Advisors
How can a teacher or a healthcare worker–people who live and work under extreme demands on their time–be expected to know what to do with a list of investment choices provided without any guidance? Will they ever find time to do the required homework that helps them understand how they really feel about risk? Or how the investments in their portfolio may perform under certain market conditions?
Most 403(b) participants lack the time, knowledge and inclination to study all of the options available to them. So it remains likely that many will make the wrong choice for their investment profile and risk tolerance.
This is where a financial advisor can be most valuable. We see tremendous opportunity in the 403(b) market and have been managing money in this space since 2003. We understand there are obstacles to entry and objections that are valid, but if your current book of business includes teachers, nurses, doctors or other participants in the non-profit sector, it might worth your time to contact us. With the right partner in place (that’s us) you can be in a better position to succeed in this market and build lifelong relationships with valuable clients.
We created a State by State Guide to the Best 403(b) Plans to help you navigate through this complex market. Our guide will assist you in focusing your efforts on established plans that could present rewarding opportunities for you while adding value to the services you provide to your existing clients.
Disclosure: This information is prepared for general information only and should not be considered as individual investment advice nor as a solicitation to buy or offer to sell any securities. This material does not constitute any representation as to the suitability or appropriateness of any investment advisory program or security. Please visit our FULL DISCLOSURE page.