Changes in IRS regulations for 403(b) plans are creating new opportunities for advisors who are willing to take action. Those who fail to act run the risk of missing out on new clients or losing existing business to competitors who are willing to do the necessary legwork.

The revisions that went into effect Jan. 1 are the first substantive changes in regulations governing 403(b) plans since the 1960s. The changes have transformed 403(b)s from IRA-like plans into full-fledged employer-sponsored programs, similar to 401(k)s. Most of the participants in 403(b)s are teachers and staff at public K-12 schools who invest primarily in annuities and mutual funds.

For independent advisors who are already handling 403(b) plans, the revisions are a game-changer. Because the rules impose full sponsorship responsibility on school districts—the employers of these teachers and staff—advisors will have to court administrators. To win this game, advisors must quickly master the rules, identify potential school district clients and approach them correctly.

New Focus

The revised rules essentially shift responsibility for administration from investment providers to school districts, which previously played a limited role. Under the old rules, districts did little more than handle payroll deductions. There was no requirement for them to educate teachers about plan options, so participants didn't always get the information they needed.

Now, to create clear accountability and ensure that eligible participants aren't left out, districts are charged with adopting plans with governing principles that apply to all participants and with communicating details and options to employees. Districts must determine participant eligibility and shoulder all administration and bookkeeping regarding enrollment, entry dates, withdrawals and distributions. Districts are also responsible for compliance.

Previously, advisors met with teachers and staff individually to explain the plans they represented, perhaps over coffee in the school cafeteria. The new venue is district offices or school buildings, where meetings can last an entire day. This means more advisor preparation to create what are often complex proposals.

To simplify administration, districts are limiting the number of investment providers for their plans. This means stiffer competition for providers. Some providers now doing business with school districts with individual participants—and advisors representing those plans—will fall by the wayside. Advisors will be representing fewer plans and, more critically, will have to compete not only for new business, but also to retain existing business.

One Advisor's Story

Advisors seeking to retain or expand their 403(b) business must proactively educate themselves on the new rules and demonstrating this knowledge to prospects. The experience of Sonny Detillier, principal of Sonny Detillier Agency in Lutcher, LA., is a case in point.

Detillier already had significant 403(b) business with school employees. Well aware of imminent rule changes last year, he knew he had to broaden his firm's scope and become an expert or face shrinking business. "The changes in the 403(b) market require advisors to change their strategies," he says. This involves thinking not just in terms of participants' needs, but also in terms of the pressures on district administrators.

As the rule revisions also mean group-level pricing, some advisors believe the new 403(b) era may be less financially rewarding. Yet compensation for dealing with groups is usually higher than that received under the previous regime, especially when it comes from larger school districts.

In entering this new 403(b) landscape, Detillier took aggressive steps. Here's how to follow his path:

• Identify target school districts. Learn about their status and procedures by contacting administrators or committees in charge of plan development and provider selection.
• Develop rapport withkey decision makers. They can explain the criteria the district uses for the selection process. The business manager usually has the most influence over which providers receive requests for proposals.
• Establish your role from the outset. You should be seen as an independent advisor who has the knowledge and contacts to educate business managers about the rule revisions. This role may involve distributing educational materials from plan providers and getting admittance to seminars by organizations such as the National Tax Sheltered Accounts Association and The Association of School Business Officials. Also, you might offer to line up representatives from providers for informational sessions with participants.
• Meet with local teachers' associations. Offer to answer their questions and lead discussions about retirement plans. This will give you a better understanding of members' needs and should help you to win their business.
• Determine needs. Find out specifically what the district wants in a plan and help administrators refine these preferences. It's important to help administrators understand that adapting to the rule changes is about more than compliance. It's about helping clients benefit from a better-quality plan with more informed choices than the one they previously had. This is your chance to demonstrate your expertise by advising administrators about suitable options and explaining the pros and cons of different approaches.