When the Employer Retirement Savings Account (ERSA) was first rolled out last year, many 403(b) advocates were cautiously optimistic, myself included. If most retirement plans -- 401(k)s, 403(b)s, 457(b)s, SARSEPs -- morphed into one plan and operated under the same rules, simplicity and understanding would reign, possibly leading to wider and wiser participation.
Historically 403(b) plans have suffered from a lack of simplicity and understanding. These problems are particularly acute at elementary and high schools, where participation rates are about 40 percent and the typical investment options are limited to high-fee annuity products. Worse, school-district officials have shown little understanding of the 403(b), and even less inclination to rectify these problems. It was reasoned that ERSA would force employers to become more of a fiduciary, which might in turn lead to better investment offerings and better education.
After initial fanfare following its February 2003 unveiling, ERSA fell off the radar until its reintroduction last week (ERSA 2.0 if you will) as part of the 2005 budget proposed by President Bush. The plan for ERSA, now as it was then, would consolidate 401(k)s, SIMPLE 401(k)s, 403(b)s, governmental 457(b)s, SARSEPs and Simple IRAs into a single type of plan to be known as the ERSA. Contribution rates would mirror rates previously established for the 401(k), 403(b) and 457(b) -- meaning $14,000 for year 2005 and $15,000 for year 2006. The Treasury Department press release announcing the new plan did not specify catch-up amounts and specific rules of ERSA as it relates to employer matching.
While still intrigued by the ERSA concept, I'm beginning to question the wisdom of this plan. The 403(b) contains some unique provisions that would end with ERSA. For example, current 403(b) participants who are unhappy with their employer's investment offerings are eligible to perform a 90-24 transfer into the vendor of their choice.
Educational institutions are allowed to offer both 403(b)s and 457(b)s to their employees. This means that employees can contribute $13,000 (for year 2004) into each plan for a total contribution of $26,000. Those eligible for catch-up provisions can contribute even more. Just recently a bill was introduced to allow all state workers, not just teachers, to participate in a 457(b) plan and a 403(b) plan. Finally, teachers are eligible for an additional catch-up provision called the 15-year-rule, which allows an additional lifetime contribution of $15,000. All of these features would disappear under ERSA.
Then there's the question of whether the sponsors of 401(k)s could live happily in the same retirement accounts as those who sponsor 403(b)s, and 457(b)s. Schools and non-profits are inherently different from for-profit businesses. It may simply be too unwieldy to blend these disparate entities into one retirement plan.
In fact, it is quite possible that the interests of schools and non-profits will be swallowed whole in the ERSA. Already the American Society of Pension Actuaries is suggesting "with respect to the ERSA proposal, that [the Treasury Department] consider retaining the 401(k) name since it has significant public brand recognition." Suggestions do not bode well for the interests of schools and non-profit employees.
In many respects the 403(b) is an ugly ducking. But changing its feathers may not be the answer. When it comes to the 403(b), simply addressing what ails the plan (poor investment choices, lack of employer and employee understanding) may be the wisest course of action. In fact, we are beginning to see tangible improvement in the 403(b) plan. Participation rates in mutual funds are increasing, and employers are beginning to take control of their 403(b) plans. Plus, as we all know, ugly ducklings sometimes grow up to be beautiful swans.
Dan Otter is an adjunct professor at American University in Washington, D.C. In addition to operating 403(b)wise and 457(b)wise, he is the co-author of The 403(b) Wise Guide , a book that Vanguard founder John Bogle calls "right on!"
