A new law in Pennsylvania will require school districts sponsoring certain retirement plans to use at least four service providers, which advisers say runs counter to best practices and will perpetuate an environment of higher record-keeping and investment-management fees.
Beginning July 1, school districts will need to have a minimum of four "financial institutions or pension management organizations" (i.e., record keepers) for 403(b) and 457 plans, which are defined-contribution plans for nonprofit and public-sector entities.
Joshua Schwartz, president of Retirement Plan Advisors, said the requirement effectively precludes school districts from consolidating retirement assets with a single provider to gain more favorable pricing due to economies of scale.
"Somebody convinced lawmakers to pass a law that makes retirement plans more expensive for teachers," Mr. Schwartz said. "You wouldn't mandate a school district to have to buy their school buses from four different companies."
Jennifer Kocher, spokeswoman for Jake Corman, a Republican state senator who sponsored the legislation, said the provision around multiple retirement-plan vendors was meant for diversification and is a fairly routine practice for the state.
"We don't just pick one company for one thing," Ms. Kocher said. "We require different bids and different options."
403(b) and 457 plans are a much smaller subset of the DC-plan marketplace than 401(k)s. They each hold $900 billion in assets, while 401(k) plans hold $5.2 trillion, according to the Investment Company Institute.
401(k) plans have evolved into a centralized vehicle in which one firm acts as record keeper for the retirement plan, often providing access to multiple investment options offered by several different fund families. Plan sponsors have a fiduciary responsibility under the Employee Retirement Income Security Act of 1974 to prudently manage the plan on behalf of plan participants.
However, 457 plans and the majority of 403(b) plans aren't covered by ERISA, meaning plan sponsors aren't beholden to the same fiduciary standards. These plans, especially those of school districts for kindergarten through 12th grade, are largely decentralized structures in which there's minimal oversight and multiple record keepers that offer their proprietary annuities and mutual funds, advisers said.
As a result, there could be dozens of record keepers for any given district. California has a law on the books that allows 403(b) plan participants to buy annuities from any provider of their choice and prevents school districts from soliciting competitive bids from 403(b) vendors, said Dan Otter, founder of 403bWise, a website that provides information for 403(b) plan participants. In Redlands, Calif., where Mr. Otter lives, the school district has 45 vendors, he said.
The decentralized structure makes data on the plans difficult to come by, but a 2010 report published by the TIAA-CREF Institute shows the sort of pricing disparity that occurs among school districts that don't try to limit the number of providers. In California and Texas, two "open-access" states, the average asset-based fee was 211 basis points and 171 basis points, respectively. By contrast, the average in Iowa and Arizona, two "controlled-access" states that use a competitive bidding process to whittle down providers, was 87 bps and 80 bps, respectively.
Many of the 403(b) lawsuits filed since August 2016, which have targeted universities for allegedly excessive retirement-plan fees, claim the use of multiple record keepers contributes to the problem.
Seeing the cost benefits, some plan sponsors have tried to consolidate their providers, advisers said. However, some state laws — like the one going into effect in Pennsylvania — prevent that from happening fully.
Mr. Otter said he's heard that Pennsylvania school districts that previously consolidated their vendors are now "scrambling" to add vendors to comply with the new law.
"We think these vendors see the writing on the wall," said Mr. Otter, speaking of the trend toward vendor consolidation and lower-cost investing. "I think this is market protection."