Compliance June 28, 2013

Compliance Issues for 403(b)s

Some retirement plan compliance issues are unique to 403(b)s.
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After years of waiting, 403(b) plan sponsors were finally provided with correction procedures for errors when the Internal Revenue Service (IRS) released an updated Employee Plans Compliance Resolution System (EPCRS) in January (see “A New Compliance Environment for 403(b)s”). Susan Diehl, QPA, with PenServe Plan Services in Horsham, Pennsylvania, told attendees of the 2013 National Tax-Sheltered Accounts Association (NTSAA) 403(b) Summit that many of the corrections are similar to the corrections for 401(k) plans, but since 403(b)s have some unique allowable features, such as catch-up contributions for employees with 15 years of service, corrections were added solely for them.

One thing the new EPCRS requires, since 403(b)s often have multiple service providers (vendors), is that plan sponsors must attempt to get signed certifications from all vendors that they will help with corrections, according to Diehl.

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The IRS also recently announced a pre-approved plan document program for 403(b)s (see “403(b) Pre-Approved Plan Program: What to Know”). Richard Turner, deputy general counsel at VALIC in Houston, Texas, pointed out that the agency announced it is not offering a plan determination letter program, so if plan sponsors want an IRS-approved plan document, it must fit into a prototype or volume submitter plan offered in the program. Turner added that, under the program, church plans can now have a pre-approved plan document.

M. Kristi Cook, Tax-Exempt and Governmental Plans Consultant (TGPC) and attorney in Jenkintown, Pennsylvania, noted that K-12 plan sponsors can still use the model plan language provided by the IRS in 2007 (see "IRS Offers Model 403(b) Plan Language for Public Schools") and have reliance that their document is compliant as if the IRS issued a private-letter ruling. However, the model language is not updated for any new guidance, so plan sponsors will have to update their plans.

According to Diehl, the model language contains two errors: it includes provisions for ADP testing, which is not required for K-12 plans, and it includes provisions for accepting rollovers from Roth IRAs, which is not allowed. She said the IRS will help plan sponsors with corrections for these upon audit and not charge a fee.

Last year, sponsors of Employee Retirement Income Security Act (ERISA)-governed 403(b)s scrambled to comply with new Department of Labor (DOL) fee disclosure rules. Many reported that all the hoopla was for nothing, and participants did not even pay attention to fee disclosures, and nearly two-thirds said the service provider disclosures they received did not lead to plan changes (see "403(b)s Report Little Impact from Fee Disclosure"). However, Carol Gransee, with Oppenheimer Funds in Centennial, Colorado, told Summit attendees a survey from Boston Research Group indicated quite a significant number of participants paid attention: 50% of participants read the fee disclosures they received and 40% changed their asset allocations as a result.

Gransee said regulators are now talking about requiring a roadmap or guide also be sent to participants telling them where to find certain fee information in the disclosure documents. She added that there has also been dialogue among regulators about requiring disclosures for non-ERISA 403(b) plans.

The retirement plan industry is still waiting on the re-proposal of a new definition of fiduciary from the DOL (see "Saxon Angle: Straight from the Source"). The new definition will obviously apply to ERISA-governed 403(b)s, but many plans, including non-ERISA 403(b)s are also governed by state law, Cook noted. In some states, if any assets are held in trust, the plan sponsor is a fiduciary, she added. Then, of course, there are Securities and Exchange Commission (SEC) rules, which apply to both ERISA and non-ERISA plans. Cook said with every task or decision a plan sponsor engages in, they should ask "for what purpose" am I doing this? Then, they should ask what DOL, state or SEC rules apply to that task or decision. Plan sponsors should be acting in the best interest of participants.

In Practice June 28, 2013

Building a Succession Plan

Advisers help many individuals prepare for a comfortable future, but who is helping advisers prepare for their future?
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For many advisers, their business is their proudest achievement, but too often those businesses are transitioned in times of chaos, i.e. divorce, death, etc. Advisers need to have control over the transition of their businesses.  

Speaking at the National Tax-Sheltered Accounts Association (NTSAA) 2013 403(b) Summit, Paul T. Lally, III, president and co-founder of Gladstone Associates in Conshohocken, Pennsylvania, said most advisers have not created an asset base outside of their business equal to its value, and only 10% have a written succession plan in place. Many advisers have created a lifestyle or job for themselves and not a company. “Every day, do you think of building a transferrable asset?” he asked Summit attendees.  

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He offered some sobering statistics: According to the Small Business Administration, 70% of small businesses fail in the transfer to a second generation, and the average age of financial advisers right now is 57—very few are entering the business.  

Succession planning is the process of deciding when and how you want your business to be transitioned and managed to protect the business and its value, as well as employees, according to Lally. Without a succession plan, wills and trusts become your succession plan documents. He said it takes about five years to successfully transition.

Advisers should first determine when and how they will leave their business. Choices are:  

  • Recruit a successor – Lally said advisers should make sure the successor is a cultural fit with the business; 
  • Sell the business – Lally noted that the best time to sell a business is when it is doing its best; 
  • Pass the business to a family member; 
  • Wind down the business – Lally said this is a choice when the adviser cannot find a buyer, the business is too much about the owner, or to solve a family inheritance issue; and 
  • Do nothing. 

In preparation for transition, advisers should maximize the value of their business, Lally advised. “Treat succession planning as an every day activity, and put together a corporate structure," he said. “Do not try to do it yourself; get advice from investment bankers, lawyers, accountants and valuation specialists.  

According to Lally, the process of deciding to transfer or sell starts with considering value. “Businesses do not trade on multiples of revenue, they trade on multiples of free cash flow. Buyers look at the amount and stability of free cash flow,” he stressed. A valuation may use estimates of cash flow out three years discounted back to present value.  

Factors affecting valuation involve whether the business is viable without the adviser—industry status, client relationships, strength of management team, cash flow and long-term demographics (number of clients in and out). Lally said for most advisers that do not sell, it is because they have an unrealistic valuation expectation.  

Lally recommended advisers design a succession plan to meet their wants and needs, and evaluate it every six to 12 months. Begin to step aside, he said. And, advisers should have a contingency plan in case something unforeseen happens.

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