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MAGAZINE

The Evolution of 403(b)

The view from the 403(b) summit

A written plan document, coordination of distribution and transfer activity, contribution limits, and remittance timing: Under the new IRS regulations, 403(b) plan structure and administration will look much more like those of their Employee Retirement Income Security Act (ERISA)-governed 401(k) counterparts. Will this work for the 403(b) plan model?

In April, PLANSPONSOR, PLANADVISER’s sister publication, held its 403(b) Summit at the Ritz-Carlton in Amelia Island, Florida, seeking to help plan sponsors and advisers answer that question.

Model Cares

Those waiting for additional guidance from the IRS dealing with 403(b) model plan language or information-sharing agreements shouldn’t hold their breath, explained Robert Architect, of Tax Exempt and Government Entities (TEGE) at the IRS.

Despite the release of only one piece of post-regulatory guidance since their issuance in 2007, Architect noted that there is much more going on in Washington around these rules. Currently, he said, his IRS division is working on a program for 403(b) plans—a means by which plans, by virtue of their adherence to an IRS-sanctioned plan design, can be “preapproved" by the IRS—a program that would be similar to one already in place for 401(k)s. However, Architect advised attendees that they should not expect the program to be open on January 1, 2009 (the general effective date of the 403(b) regulations), and plan sponsors will have to comply with the regulation’s written plan requirements, regardless.

The IRS has received a number of comments about language that should be incorporated in that model plan, he said, and many call for addressing things such as Roth contributions or matching contributions. However, Architect said the IRS will not be issuing more guidance during this regulatory year in that area. Revenue Procedure 2007-71 contained model plan language for public school use, and Architect said that, if a public school plan uses that language, it will not run afoul of the IRS’s form requirements. Employers do not have to use the model language in its entirety if it does not apply to their individual plan, Architect cautioned, noting that employers should “use what is applicable to your organization." Architect also noted that plans can add language, if necessary, and the model language protection “does not blow up."

The model language also can be used by organizations other than public schools. Although, technically, it does not meet the reliance standard it has for the public school use, “get real," Architect reassured the audience, “it is language that we wrote" and examiners will not be penalizing organizations that use this language, even if not a public school.

Another area of concern is information-sharing agreements between the plan and providers that commit the latter to sharing information about participant transactions such as loans and withdrawals to ensure compliance with plan terms. Architect said that the IRS will not publish a model information-sharing agreement. However, he noted, the IRS did say what should be in such an agreement in Section 6.4(d) of the model language, so plan sponsors can look to that for guidance.

Architect also noted that TEGE is working to expand the 403(b) provisions of the Employee Plans Compliance Resolution System (EPCRS). There has been limited 403(b) business in that area, something that, somewhat ominously, Architect expects will change. Those new provisions will help plan sponsors remedy some of the more common defects applicable to 403(b) plans.

No Easy Task

Having a formal plan document is nothing new for those in the ERISA world, but for those plans that have not been ERISA programs previously, putting on paper all plan provisions (loans, hardship withdrawals, etc.) and details of investment options is going to be anything but business as usual.

S. Kurt Hettel, Managing Director of RSI Financial Services, and C. Todd Lacey, Managing Partner, The (k)larity Group, said one of the early decisions necessary before preparing the written document is whether the plan sponsor wants the plan to be governed by ERISA. Even if a sponsor decides to forgo being ERISA-governed, Lacey said it still may be considered a de facto ERISA plan if the employer reserves too many direct plan duties for itself.

Also considered a critical precursor to the plan document: a decision about the number and types of investment providers. Summit attendees heard a great deal during the day-and-a-half conference about the transition between 403(b) sponsors having numerous investment options to offering a more limited lineup (including cutting back to a single provider).

According to Lacey, the decision on the number of investment options is relevant because investment policy should be an important part of the resulting plan document and because it will affect how the plan document drafters treat the issue of legacy contracts. Panel attendees learned that many 403(b) sponsors face a problem in how to handle existing annuity contracts between a provider and a participant, in part because some providers will not give the plan an account of a participant’s assets since the plan is not a contract party.

Lacey suggested that plan document drafters at least obtain copies of all legacy contracts to include in the plan document package. Sponsors may need to contact legal counsel if a provision in a legacy contract conflicts with a provision the plan wants to include in its terms, he said.

Hettel advised panel attendees to prepare a summary plan description (SPD), and both speakers suggested making certain every eligible participant receives an SPD and a copy of the plan document. The distribution process should be carefully documented as well, both speakers suggested.

Picking Providers

As plan sponsors continue to react to and prepare for the new 403(b) regulations, some may find that they are in need of new providers. However, that is not the only reason to conduct a search or a request for proposal (RFP). A search also can take place when a plan sponsor is receiving bad service, or simply as a way to benchmark a plan’s services or fees, said Jeb Graham, retirement plan consultant with CapTrust.

Sponsors should not underestimate the usefulness of evaluating and improving their 403(b) programs. Brent Bentrim, Managing Director, Carolopolis Fiduciary Counsel, said sponsors should look at the process as a good thing that will benefit participants and lower program costs. Scott Dauenhauer President Meridian Wealth Management added that sponsors should reevaluate their programs every few years to look for ways to make them more simple and valuable to participants. Once in place, plan administrators must monitor providers. As Bentrim said, sponsors are not just responsible for getting the new program in place, but must perform ongoing reviews.

Often, the RFP process begins with a basic request for information (RFI), said Peter Margiotta, National Sales Director, National Account Markets at Great-West Life. Many sponsors’ RFIs focus on price and fee disclosure, he noted. Many sponsors come to Great-West directly, and without an intermediary, Margiotta added. Tom Blanchar, 403(b) and 457 Product Manager, StanCorp Equities, Inc. (The Standard), pointed out that RFP response times will get longer as more plans get into the search process, and sponsors also must add in time for participant education and enrollment.

In order to create the proper RFP, sponsors or search committees need to understand plan design. When completing the RFP on their own, plan sponsors must decide which providers to send it to, and defining the universe of providers can be the biggest hurdle for many sponsors, explained Michael Kozemchack, Managing Director at Institutional Investment Consulting. Some providers, depending on the plan size, will not respond to a custom RFP, he commented. Sponsors should not exclude current vendors in their search process. Bentrim suggested sponsors and advisers get feedback from participants and union representatives about the current vendors’ services. Blanchar pointed out that current vendors may have systems already in place that are needed for compliance with the new regulations.

The biggest consideration in deciding what avenue to pursue is whether or not the sponsor has the resources and expertise about the retirement plan landscape in-house to be able to complete the potentially monthslong process. Ensuring that people are available for the duration of the project is vital, Graham said.

During the RFP process, Michael Pratico, Vice President, Financial Advisor, CAPTRUST Financial Advisors, suggests sponsors and advisers ask for pricing of services apart from fund pricing and compare prices among providers. They also should look for providers with technical expertise, he said. Sponsors should find out what is included in all service offerings. John Pickett, Senior Vice President Institutional Consulting Group, RBC Dain Rauscher, suggests sponsors list the services they require for their programs and ask providers to price each service. He stressed that sponsors need complete fee transparency from vendors.

Plan providers need to have all the necessary facts and circumstances about the plan when responding to the RFP. Further, well-drafted RFPs explicitly state their goals up front, Margiotta added, such as to increase participation or lower fees. If sponsors offer in the RFP what will be the criteria for selection and retention of a new provider, providers will be better equipped to respond to the RFP, Graham said.

Adviser Roles

Emile Schoffelen, CEO, Cammack LaRhette Consulting, noted that, although advisers or consultants cannot take away the fiduciary responsibility assigned to sponsors, they can share the responsibility. David Levine, an attorney with Groom Law Group, added that a good consultant knows all processes and can help keep a plan in compliance.

Stephen P. DesRochers, Wealth Management Advisor, Merrill Lynch Private Client Group, pointed out that 403(b) plan advisers also have experience working with providers to ERISA plans and can be a liaison to these providers for non-ERISA plans. Advisers also can help 403(b) sponsors establish processes and documentation that can be used to defend these processes, as well as take on tasks such as participant education, he said.

Schoffelen agreed that it is a good idea to bring in an adviser for certain tasks because 403(b) sponsors will need help that many 401(k) sponsors do not need. He noted, for example, that participant education and enrollment meetings will have to take place in multiple locations for public school employers and may need to take place at multiple times for employers such as hospitals that have workers for different shifts.

Phyllis E. Klein, Managing Director, CAPTRUST Financial Advisors, and Bob J. Toth, a Partner at Baker & Daniels, LLP, did not mince words about what lay ahead—particularly since so many 403(b) plans are operating in a multivendor environment. “This time next year, we’re going to have a lot of scariness going on [when it comes to data collection]," declared Toth.