Why Recordkeeping Pricing Is Different for 401(k)s and 403(b)s

By John Iekel • September 11, 2018 • 0 Comments
The price of recordkeeping services is not uniform; it can vary depending on type of retirement plan. A blog entry discusses why pricing for 401(k0S is different from that for 403(b)s.

In “The Differences Between 403(b) and 401(k) Pricing,” Michael Webb of Cammack Retirement offers some explanations regarding why such services are priced differently.

Webb observes that while there are some exceptions, especially among the largest retirement plans, recordkeeping generally costs less for 401(k) plans than for 403(b) plans with assets of comparable size. He attributes that to fundamental differences between 401(k) and 403(b) plans. And that, in turn, results in 403(b) plans taking more work to administer. “And more work equals more money,” he notes.

Webb argues that the following factors help explain why recordkeeping is more expensive for 403(b) plans.

Employer Control. In a 401(k), argues Webb, plan assets generally are all in one place, which makes the transition to a new recordkeeper and/or trustee relatively straightforwards and easily priced. “Thus, 401(k) plans (particularly large ones) enjoy the purchasing power of their all-in-one-place assets,” he asserts. Unlike 401(k) plans, however, 403(b) plans usually have multiple contacts, and many are individual. Writes Webb, “Those contracts could reside with a single vendor but are often with multiple providers. As you can imagine, pricing this mess can be nightmarish, as a 403(b) recordkeeper not only has to factor in the assets that will be in the control of the plan sponsor, but those that are not, since these assets affect the pricing of services such as compliance and participant communication.”

Group Trusts. Group trusts are the dominant funding vehicle for 401(k) plans, but it is rare for a 403(b) to be funded by a group trust, says Webb. instead, they largely are funded by annuity contracts and custodial accounts. Group trusts take less work, he says, which adds to the cost for 403(b) plans; Webb calls this “a major pricing advantage” for 401(k)s.

Annuity Contracts.
Webb argues that annuities are still a “dominant investment type” for 403(b)s, but not for 401(k)s. Since they are “difficult to recordkeep,” their dominance adds to the expense of work on 403(b)s.

Multiple Providers. Webb says that it is not unusual for a 403(b) to have multiple recordkeepers, whereas it is common for 401(k)s to have one. That, he says, adds to the complexity of the process as well as it its cost for 403(b)s.