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Dan's Blog

Power of 403(b) Group Contracts 💪🏽

January 15, 2019

Groupthink is a psychological phenomenon that occurs within a group of people in which the desire for harmony or conformity in the group results in an irrational or dysfunctional decision-making outcome (Wikipedia).

The K-12 403(b) is a largely dysfunctional retirement plan that is need of some Groupthink. But not that kind of Groupthink. Too many 403(b) plans are made up of countless individual contracts. In order to gain power and better pricing, school districts need to move to group 403(b) contracts. 

Think Different

Apple Inc. famously celebrated those who Think different. It's time that the K-12 403(b) world did a little of that. We can look to the pioneering computer company for inpiration. If you work at Apple you have access to a group 401(k) plan. Their retirement plan has been put out to bid and a single financial firm was chosen based on a variety of metrics. According to Brightscope, Apple's 401(k) is in the top 15% of plans for salary deferral and plan cost. If in say, two years, Apple wanted to put its plan out to bid it would be very easy for them to move plan assets to a new vendor. The reason? Apple's plan is a group plan controled by the company and held at one financial firm. This is not the case in the K-12 403(b) world.

A School District That Thinks Different: Montgomery County Public Schools

The overwhelming majority of K-12 403(b) plan assets are held in individual contracts because the majority of K-12 403(b) plans are multi vendor. This means the assets are spread across a variety of financial firms within a single school district. This makes it especially difficult for an employer to conduct an RFP in an effort to get favorable plan pricing. But this doesn't have to be the case. Even in a multi vendor environment the employer can control plan assets. This is exactly what Montgomery County Public Schools (MCPS) in Rockville, Maryland did when it moved from 15 vendors to 9 vendors before eventually moving to a single vendor group contract plan. 

Simple Economics

Individual contract K-12 403(b) plans have been compared to start up plans. The pricing of the products is atrocious because the plans lack critical mass. It is simple economics. Schools already have group healthcare plans. There is no reason they can't demand similar control of their 403(b) plan. Moving to group contracts will wrest power away from the financial firms and place it where it belongs: with the employer. While some may see those like MCPS as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the 403(b) world, are the ones who do.