Information on Thomson’s explains that 403(b) contracts that
offer variable investment funds are subject to the jurisdiction of the
Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment
Company Act of 1940. Because of this, 403(b) investment contracts must be
“registered” with the SEC and are treated very similarly to mutual funds
offered for sale to individuals outside of retirement plans.
One requirement of being an investment company is that an
individual’s financial interest in those companies must be able to be freely
distributed at any time. However, this causes a potential problem with 403(b)
plans. The Internal Revenue Code requires that certain distribution
restrictions be placed on all contributions to a 403(b) custodial account and
on elective deferrals made to annuity contracts.
In 1988, the SEC issued a no-action letter stating that it
would take “no action” against 403(b) plans that impose these distribution
restrictions, as long as:
prospectus includes a disclosure about the distribution restrictions;
sales literature includes information about the distribution
selling the product specifically to the participant brings the
distribution restrictions to his or her attention; and
participant signs an acknowledgement of the distribution restrictions
before making a contribution.