Employees of school districts, municipalities and certain tax-exempt organizations may stash up to $18,000 this year in 403(b) and 457(b) retirement-plan accounts and make catch-up contributions if they’re age 50 or older -- the same as workers offered 401(k) plans by for-profit employers. But they’re less likely to participate.

According to 2016 surveys from the Plan Sponsor Council of America, 71.6 percent of eligible employees contribute to 403(b) plans, compared to 87.6 percent for 401(k) plans.

In school districts across the U.S., participation rates of 30 to 50 percent are common for 403(b) plans, says Stewart Jacobson, president of Dearborn & Creggs, a Sugar Land, Tex.-based independent financial planning firm that has a big focus on 403(b) and 457(b) plans. Some big school districts that have switched to a single provider and eliminated employee education, to reduce plan fees, have “failed miserably,” he says, with their plan participation rates sinking to the low 20s.

Plan sponsors must educate employees about 403(b) and 457(b) plans so they’ll sign up, says Jacobson, a finalist for the 2017 National Tax-deferred Savings Association (NTSA) Elite Advisor Award for best practices in these plans. Don’t rely on 401(k) training; “they’re completely different animals,” he says.

For starters, 403(b) and 457(b) plans are offered in addition, rather than generally in lieu of, traditional defined benefit plans. But Jacobson, whose firm’s largest contract is the Houston Independent School District, doesn’t view these offerings as optional because defined benefit plans often aren’t enough to fund employees’ retirement. This can be especially true for workers who’ve bounced from municipality to municipality, he says.

Most of Texas’s school districts and many of its municipalities have also opted out of giving their employees Social Security coverage to supplement their retirement income, he says. “The 403(b) and 457(b) are so important to these folks but they don’t know it,” he says. Nationwide, 27 million state and local government workers won’t get Social Security, according to data from the Congressional Research Service.

Employees eligible for 403(b) or 457(b) plans need help understanding how much they need to save for retirement, how inflation can impact their standard of living in retirement, and that their pension is unlikely to be enough for them to live on, says Jacobson.  To educate and sign up employees, “We’ve been to the county jail at 11pm during shift change,” he says, and the firehouse at midnight.

More Hands-On Help

Scott Hayes, president and CEO of Dallas-based ISC Group, an independent broker-dealer and independent RIA, also stresses the importance of providing education for 403(b) and 457(b) plans.

“It requires more hands-on participant level advice than it does in the 401(k) world,” he says, because these employees are often underpaid and need help creating budgets and getting out of debt before they can start saving.

Like Dearborn & Creggs, ISC Group tends to run 403(b) and 457(b) retirement plans as if they’re all regulated by Erisa and subject to the Department of Labor’s fiduciary standard. “It’s just the right way to run the business, in my opinion,” says Hayes, also a finalist for the 2017 NTSA Elite Advisor Award.

ISC Group puts clients’ interests above its own and primarily receives level-fee compensation for its services. It uses auto enrollment, auto escalation and qualified default investment alternatives (QDIAs) when available, but Hayes notes these features aren’t always permitted in the not-for-profit space. It also uses no-revenue share classes whenever possible or, if unavailable, credits revenue back to plans.
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Some school districts have started pressing advisors to take on a fiduciary role, particularly since many prominent universities have recently been sued for alleged mismanagement of retirement plans. Meanwhile, rollovers of 403(b) and 457(b) plans to IRAs are subject to best interest contracts under the DOL rule, says Hayes.

He’ll be closely watching over the coming months how tax reform under the new administration could impact retirement plans. “People are going to continue to need advice from financial professionals regardless of what the tax codes say,” he says.

Jacobson, of Dearborn & Creggs, is hopeful new rules won’t make it onerous for independent advisors like himself to help public servants supplement their retirement nest eggs with 403(b) or 457(b) plans. “They’re not buying derivatives,” he says, or manipulating currency.