Not only are 403(b) retirement plans diversified, but the average cost of offering them decreased slightly from 2009 to 2012.
A study by BrightScope and the Investment Company Institute found mutual funds accounted for 47% of 403(b) plan assets in 2012. Variable annuities held 27% of assets and fixed annuities accounted for 26%. According to the data, the average ERISA 403(b) plan offered 23 core investment options, including 10 equity funds, three bond funds and seven target-date funds.
“403(b) plans play a critical role in the retirement marketplace,” says Brooks Herman, head of data and research at BrightScope. “This study reveals that plan design features of 403(b) plans governed by ERISA are as dynamic as those found in 401(k) plans and that 403(b) plan sponsors design their plans to generate accumulations that will provide participants with substantial retirement savings.”
Last year, 403(b) retirement plans held $0.9 trillion in retirement assets, a slight increase from $0.8 trillion in 2012 and 2013. About 41% of total 403(b) plan assets are held in ERISA 403(b) plans, BrightScope/ICI found. These types of plans are offered by nonprofit organizations, like schools, hospitals, arts and entertainment, religious organizations and social assistance groups.
BrightScope and the ICI collected data on plans with more than 100 participants from the Employee Retirement Income Security Act Form 5500 reports, including the number and type of investment options offered, the presence and design of employer contributions, features of automatic enrollment and changes to plan design over time.
“This research spotlights a less well understood area of the U.S. retirement system,” says Sarah Holden, senior director of retirement and investor research at ICI. “The broad array of investment options available to ERISA 403(b) plan participants, and the large incidence of employer contributions that we found, attest to strong plan design features and employers’ support for employees’ retirement well-being.”
In 2012, the average total plan cost for a 403(b) plan, including administrative, advice and other fees, was 0.75% of assets, down from 0.80% in 2009. The average participant was in a lower-cost plan, with a total plan cost of 0.58% of assets in 2012, down from 0.68% in 2009, BrightScope/ICI reported. Larger plans have lower mutual fund expenses and those have also decreased over time.
About four out of five employers that sponsor 403(b) plans made a contribution to them in 2012, with 31% of plans using a simple match formula in which they match a certain percentage of an employee’s contributions up to a maximum percentage of employee salary, the study found.
For those plans that use automatic enrollment, the most common default contribution was 3% of an employee’s salary. In 2012, 43% of plans used a 3% contribution rate, 19% had a default initial contribution of 2%, 14% had a default initial contribution rate of 4% and 13% had a default contribution rate of 5% or more, BrightScope/ICI found.
Paula Aven Gladych is a freelance writer based in Denver.
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