403(b): Centralized Versus Decentralized Administration

June 16, 2009 (PLANSPONSOR (b)lines) - Some 403(b) plan sponsors have structured their plans with a single investment provider, and the number of plans designed this way has likely increased in the wake of the final 403(b) regulations. Nevertheless, many 403(b) plans continue to include multiple investment providers/recordkeepers.

Even where the plan currently restricts participants to a single investment provider, the final 403(b) regulations require coordination across that provider and additional providers that were previously deselected from the plan prior to 2008.

If the plan is subject to Title I of ERISA, prior deselected providers may need to be included in the plan even if the 403(b) regulations would not require their inclusion. In addition, even non-ERISA plans that do not fit into either category today will fall into the second category if the plan sponsor selects a new investment provider after December 31, 2008, as long as any assets remain with the prior provider.

The final 403(b) regulations make it clear that the plan sponsor is responsible for either:

  • Performing any necessary coordination across these multiple providers to ensure plan-level compliance for such transactions as loans and hardship withdrawals; or,
  • Allocating those responsibilities to one or more plan investment and service providers.

The only practical limitation on how the plan sponsor chooses to allocate those responsibilities-to itself or to investment or service providers-is that the responsibilities cannot be assigned to the participating employees.

Loans provide an important example of how this limitation applies. Under previous Treasury Department guidance, if a participant maintained accounts with more than one provider, each provider could rely on the participant’s representation that he or she did not have loans with other providers that would cause the requested new loan to exceed applicable limitations. Under the final regulations, such reliance is gone. As a result, someone on behalf of the plan must now determine whether the loan, when combined with other loans under the plan and loans under other plans of the employer, are within applicable limitations.

Responses to this new set of requirements across multiple providers generally have fallen into either a centralized or decentralized coordination model.

Centralized Coordination

This alternative generally involves the collection of key data specifically related to the coordination requirement, either:

  • in a centralized repository, or
  • through confirmation of key data for individual transactions.

The centralized function may be performed by the plan sponsor, a third party, or a plan provider (or an affiliate of a plan provider) designated to perform this plan-level service. If the party providing this service is an investment provider to the 403(b) plan, or another plan of the employer, or if they have a direct relationship with such a provider, the plan sponsor will likely want to confirm that those functions are clearly separated.

Decentralized Coordination

In this structure, each provider would be required to take into account information about other accounts the participant maintains under the plan, as well as in other plans, in order to confirm the participant's eligibility for a distribution or a loan. There can be multiple options for identifying the providers and accounts that need to be confirmed, for any one participant, before processing the next loan application or hardship withdrawal request.

The process of obtaining or confirming information from other providers may also require consideration of any privacy requirements under applicable federal and state laws, requirements that might be addressed either by appropriate employer direction or, in certain cases, participant consent. In both models, once the coordination is properly applied, the actual transaction can be processed by the underlying investment provider.

Making a Choice

As employers evaluate the range of alternatives, they may be drawn to different alternatives based upon their individual circumstances. For example, a very large school district with a large number of providers may select a centralized coordination approach to ease administratioin. On the other hand, a small school district with 100 participants, only five of whom maintain accounts with more than one provider under the plan, may choose a decentralized coordination structure because it represents the best use of the district's resources. And of course, the provider's selections may be significantly influenced by applicable state laws and restrictions.

- Richard Turner serves as Vice President and Deputy General Counsel for VALIC. Turner has worked extensively with retirement plans and products for 25 years and is a frequent speaker on the topic. He is also a contributing author of the "403(b) Answer Book."