Small School Districts Can Offer Top Notch 403(b) Programs
It's not hopeless, in fact there are some great options
It’s a challenge for small school districts to offer a quality, low-cost 403(b) plan. Why? Economies of scale. Small school districts simply don’t have enough assets under management to get favorable pricing.
Small school employers are important to the community and the employees who work there should have access to high-quality, low-cost retirement programs.
What most small school districts don’t realize is that they can offer a quality 403(b) option that often rivals 401(k) programs from some of the largest companies in the United States. They just have to do a little bit of homework.
Here are a few ideas to bring a quality retirement program to smaller school districts.
State Based Plans
Very few states have opted to create their own 403(b), the few who do, generally offer great programs. California, North Carolina, Maryland, Oklahoma, Delaware and Vermont offer a product or plan that any public K-12 school district is allowed to adopt and offer to their employees. Though they are not perfect, they are surrender charge free and generally high quality.
A consortium is simply a collection of employers who have banded together to use their collective power to bargain for a better product. One small school district may not have the leverage to negotiate reasonable pricing, but when they join with several other districts, their power might multiply exponentially. There are already several that exist and while they have not always been run well, the idea itself is sound.
Here is a list of the consortiums we are aware of (this is not an endorsement, do your due diligence):
IPPFA (only single vendor as an option)
Fringe Benefit Consortium
CSD Retirement Trust
IPPFA (only single vendor as an option)
Who are we missing?
Consortiums are not perfect. There are some who will use the program to sell low-quality ancillary products to unsuspecting educators who believe those products are also endorsed by the consortium.
Don’t Offer a 403(b), Offer a Single Vendor 457(b) Instead
Did you know that you don’t have to offer a 403(b)? It’s true, you can freeze your 403(b) and decide to only offer a 457(b). This is especially helpful if your state offers a quality 457(b) (like Ohio, California and New York) and makes it available to public K-12 employers. I realize this is the equivalent of going nuclear, but it has the upside of allowing for a single message to employees and if done correctly, a higher participation rate. There are certainly downsides to this strategy, but it shouldn’t be dismissed outright.
Add Vanguard (or Fidelity or Aspire), Be Vocal
Vanguard now offers its 403(b) product to almost any school district that wants it. It’s a high-quality, low-cost option that is literally yours for the asking. Add Vanguard and be vocal about it. You don’t have to officially endorse Vanguard, but you can provide education around how fees affect your retirement and then compare the fees of the vendors offered.
Do you want to immediately upgrade your retirement plan? Add Vanguard. For that matter, you could also add Fidelity and Aspire.
One advantage of adding Aspire is that you can allow qualified advisors to work with your employees and the employees can make the choice of whether they want to add a fee to pay for that advice.
Secret Low-Cost Vendor Products
I wrote about these vendors on my substack in an article titled “Secret Lower-cost 403(b) Products That We Hope You Never Have To Use”, you can read here. The downside to these lower-cost products is that the vendors offering them are purveyors of high-cost, lower quality products, they just happen to offer a lower-cost option that they never talk about. Another issue is the lower-cost product might not be offered in every school district where they have a payroll slot.
What are some other ways smaller school districts can go about offering a high-quality 403(b) to their employees?