PANC 2010: The 403(b) State

Between the effects of the economic downturn and the implications of sweeping new regulations, sponsors of 403(b) plans have been through a lot in the past couple of years. 


David Hinderstein, President, Strategic Retirement Group Inc., an NRP member firm, told attendees at the PLANADVISER National Conference that many tax-exempt entities did not have the administrative set up in place to handle the new requirements of the 403(b) regulations, and due to budget cuts following the downturn, sponsors are faced with the question of how to pay for what they need in order to comply. Jewell Lim Esposito, Esq., Partner, Constangy, Brooks & Smith, said many sponsors have not complied with the regulations; in fact, many have not even gotten their written plan document in place.  

Vince Rainforth, VP, Business Development-Tax Exempt Market at Principal Financial Group, points out that the regulations forced many plan sponsors to decide whether they would be governed by the Employee Retirement Income Security Act (ERISA), and some found out they already were, but didn’t know it. Many of the new administrative duties required by the regulations can default sponsors into ERISA status. Therefore, sponsors are looking for help.  

Rainforth added that 403(b) sponsors are dealing with increasing costs because of administrative expenses they didn’t have before.  

Ryan Gardner, Principal, Fiduciary Investment Advisors, said advisers need to educate sponsors not only on the new regulations, but on processes and options for administration. In addition, sponsors should be educated on fees: what fees there are, what is reasonable, and how they are paid.  

Advisers should understand that 403(b) sponsors want an adviser that is compatible with their mission, so advisers should understand the market group they are serving: K-12, non-profit, higher education, or church-related organization, according to Hinderstein. Also, within these markets could be groups that will have a strong influence on any plan decisions, whether employee unions in the K-12 market, or university officers in the higher education market.  

David Ray, Vice President, Strategic Sales, TIAA-CREF, added that familiarity with the employee demographics of the market will give an adviser more credibility.  

In addition, according to Esposito, if an adviser wants to be in the 403(b) space, he or she must be prepared to also deal with a companion 457(b) plan or 457(f) plan. Finally, Rainforth said sponsors should understand the history of the 403(b) plan space; for example, K-12s have a history of multiple providers, and many plans provided participants taking loans with coupon books and didn’t track repayment. For this reason, there could be a great number of legacy vendors to deal with and a number of outstanding loans that have never been repaid.

Dealing with Providers and Regulators  

With new administrative duties and a trend toward vendor consolidation, advisers to 403(b) plans will likely be asked to help sponsors search for providers. Gardner said it is important to find providers with experience with 403(b)s, especially in the market in which the sponsor exists. The provider should understand the different market segment needs, have the technology and knowledge to be able to comply with all regulations, and offer fee transparency.  

Rainforth said advisers should be aware of vendors without 403(b) platforms that try to convince sponsors to move to a 401(k), claiming it will make things easier. The two plans cannot be commingled and it is often very hard to terminate a 403(b) because of individual contracts between vendors and participants, so the sponsor will likely end up with two plans to maintain.  

With the new rules, sponsors can expect regulators to follow up to ensure compliance. Esposito said the Internal Revenue Service and Department of Labor (DoL) have already identified problems with employee deferrals not making it to investment providers. In addition, the DoL is looking closely at loans and hardship distributions to make sure the right documentation and approval process has been used.  

Esposito also said if a plan financial audit has a caveat due to a problem getting information from legacy vendors, this is a flag for the DoL, and the adviser should prepare his client for a DoL audit. Advisers can help sponsors choose an auditor with experience in employee plans.  

Ray added that advisers should align with an auditor to help their plan sponsor clients. He noted that a list of approved auditors for 403(b) plans can be found on the American Institute of Certified Public Accountants Web site: