YOU HAVE FOUND OUR OLD WEB SITE. BE SURE TO CHECK OUT OUR NEW AND IMPROVED SITE!     ERSA and the 403(b) Teachers and Not-for-Profit Workers Might Finally Have the Retirement Plan They Deserve     On January 31, 2003 the Bush administration proposed replacing the 401(k), SIMPLE 401(k), governmental 457 and 403(b) plan with a new Employee Retirement Savings Plan (ERSA). Forget war on Iraq, with this proposal the Bush administration is declaring war on the baffling complexity of employer savings plans. "No longer will individuals have to worry about the confusing alphabet soup of six different savings accounts," declared Treasury Assistant Secretary for Tax Policy Pam Olson in announcing the new proposal. "No longer will people have to worry about the endless maze of confusing rules."   In the battle to improve retirement plans, the Bush administration has dropped the big one. As far as teachers and not-for-profit workers are concerned, it couldn't have happened a moment too soon. Since 1958, these employees have been held captive by the needlessly complex, often inferior 403(b) plan. More than 12 million workers are covered by the 403(b) but you would be hard pressed to find more than 100 who truly understand it. You would be equally hard pressed to find many quality 403(b) plans. The typical 403(b) plan is full of high-fee insurance products pushed by agents. This probably explains why little more than 50 percent of eligible workers participate in the 403(b). This compares to private sector employees who participate in the 401(k) at better than an 80 percent clip (source: US News and World Report).   Under the Bush proposal teachers and not-profit-workers would cease being allowed to participate in a 403(b) after 2003. Instead they would contribute to a new ERSA plan that would be offered by their employer. Workers would be allowed to keep their old 403(b) plan, but wouldn't be able to add money. Consider it tough love.   How ERSA would help teachers and not-for-profit workers:     Since they would be contributing to a plan that now covers virtually all employees, teachers and not-for-profit workers would be exposed to much more information about their retirement plan. Currently very little is written in the mainstream financial media about the 403(b) plan.   Simplicity. One plan. One set of rules. When employees understand their plan they are much more likely to participate.   Since an ERSA will operate very much like a 401(k), employers should finally have the ability to gain control of their plan. Today it's not uncommon for 403(b) plans to feature scores of vendors, most of which are high-fee insurance products pushed by agents. In some states (California in particular) employers are barred by state law (written by the insurance industry) from exerting control over their plans. Beginning in 2004, all employers should be able to initiate a request-for-proposal (RFP) process long-employed by 401(k) employers for vendor selection. The advantage of an RFP is that financial institutions would be forced to compete to earn a school district's business. Districts could demand online enrollment, and access to quality, reasonably priced products in all appropriate asset classes. Instead of scores of vendors with perhaps a quality choice or two, districts would be assured of having the exact vendors they want.   Less vendors under ERSA. Make no mistake, when it comes to vendors, less is usually more. The reason? In the current environment, sales agents representing scores of vendors pitch products in places like teacher's lounges and hospital cafeterias. When an employer is able to select a handful of quality vendors (with the emphasis on quality), winning companies are much better positioned to provide education. Nothing would stop a district from including a firm with agents if they determined their services justified their fees. We would strongly recommend that at least one low-fee provider be included in any mix. Another bonus to employers: less vendors means easier compliance control.     As in everything in life, there are some downsides to ERSA for teachers and not-for-profit workers. Under ERSA they won't be able to make dual contributions to a governmental 457. Most likely they also won't be allowed to initiate a 90-24 transfer out of their employer plans to an outside vendor (which is a big deal for participants stuck with only poor employer choices), or participate in a special catch-up rule known as the 15-year-rule. While nice, these provisions are mostly not understood or utilized. If employers select quality vendors, the overwhelming number of teacher and not-for-profit workers should be much better served by an ERSA.   ERSA still must work its way through Congress so much is still unknown. If the final law is written in such a way that allows employers not to offer ERSA plans, or severely restricts access to the plan, then of course, all bets are off. If employers unwisely limit their employees to one bad company, then of course ERSA is of no use. But if ERSA can be done right, and lets face it that's a big IF given how school districts have handled the 403(b) in the past, then really perhaps, finally order, education and quality choice can be brought to the 403(b).   Home | Disclaimer | © 2003 bWise Guys, LLC. All rights reserved.				More Information More ERSA Information ERSA FAQs Treasury Department Press Release Got an ERSA/RSA/LSA question? Got an ERSA/RSA/LSA answer? Join Discussion