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Less Choice Leads to Lower 403(b) Participation

ARLINGTON, VA – New research published by the National Tax-Deferred Savings Association (NTSA) confirms that a decrease in investment choice and reduced access to advisors leads to lower retirement plan participation by teachers in 403(b) plans

The research, based on data from nearly 4,500 school districts across the United States, was published in “Improving Retirement Savings for America’s Public Educators”, a white paper authored by Jason J. Fichtner, Ph.D., a Senior Lecturer of International Economics at Johns Hopkins University’s Paul H. Nitze School of Advanced International Studies.

The research finds:

25% greater participation in plans with 15 or more investment providers compared to plans with only one provider.

Account balances are, on average, 73% higher among plans with 15 or more providers compared to single provider arrangements.

There is a 203% increase in average contribution rates among plans providing access to 15 or more providers compared to plans with only one provider.

Single provider arrangements have the lowest participation rate; 8% below the national average.

“Simply stated, the data reveals a positive and significant correlation between the number of choices/advisors and participation,” notes Fichtner.  “The research revealed that the number one factor driving participation and savings rates in school districts is participant choice”. 

The data bears out the experiences of school districts across the nation, including:

55 school districts in California that experienced a 56% decrease in participation after reducing investment choices.

A Maryland school district that went from 10 investment providers to one, and saw the number of active participants drop from 1,000 to 775.

A Florida school district that reduced choice from 12 to 5 investment providers and lost more than 1,000 active contributors, all of whom had not resumed participation since the change at the time of the survey.

Three hundred school districts in Michigan that cut back 16 to 5 investment providers, and saw participation plummet from 23,000 to fewer than 17,000 active contributors. Today, after adding back several investment providers, they are finally back to 23,000 participants.

In 2009, Iowa transitioned from a competitive, open 403(b) marketplace model to a narrow number of five options, only to see participation rates plunge up to 50% in some counties.

In contrast, recent research conducted by AXA found that:

Participants who use an advisor contribute 49% more annually on average.

Participants who work with an advisor are significantly more likely to have increased their contributions 24% more often since opening their account.

Participants report higher satisfaction (72% vs. 54%) with their 403(b) plan overall and higher confidence (64% vs. 56%) in meeting their retirement goals when working with an advisor than those who do not. 

Overall, the research finds that public employees who have access to retirement educational resources at the workplace and the assistance of financial professionals are saving earlier and contributing more to their 403(b) plans, and have greater confidence in being able to achieve their retirement goals.

“The range of participation rates in America’s public school districts is dramatic, suggesting that the choices that each school district makes available to employees and the resources that they provide to help employees understand the benefits of participation are key differences in driving participation rates,” noted Brent Neese, Executive Director of NTSA.  “While expanding investment provider options may create more administrative complexity for individual school districts, the paper suggests other alternatives to alleviating this burden, such as using an independent third party administrator (TPA) to administer the plan and providing transparent disclosure of investment fees and other expenses to workers”.

About the National Tax-Deferred Savings Association (NTSA)

Formed in 1989, the National Tax-Deferred Savings Association (NTSA) represents more than 5,000 practitioners, agencies, and corporate members. For nearly three decades, NTSA has been nationally recognized for its thought leadership and policy expertise with regard to public-sector retirement plans. NTSA represents its membership in Washington, D.C. and state capitals across the country to address issues and design retirement plans that improve employee outcomes. NTSA also provides high-quality education, professional development, and information resources for those involved in the 403(b) and 457(b) marketplace.

Media Contact: Nevin E. Adams, JD, Chief Content Officer, American Retirement Association, 703.516.9300 Ext. 114, NAdams@usaretirement.org