403(b) Plan Sponsors and Advisers Cite Compliance Progress

The bad news is those that are not are either cutting it very close or not going to make it. Asked if clients were on schedule to meet the deadline, one plan adviser responded: “Absolutely not!”

Reasons cited for the delay ranged from problems getting decision-maker approval (11% of sponsors and 26% of advisers said they are having a problem in this regard) to a misperception that non-calendar year plans do not have to be in compliance by January 1.   However, the regulations actually apply to “taxable years,” not plan years, beginning after December 31. “Regardless of the plan year, the final regulations will in most cases (other than certain church 403(b)s where the authority to amend is vested in a church convention), apply as of that date,” cautioned David Levine, Groom Law Group, Chartered. (See (b)lines Ask the Expert: Compliance Deadline).  

In addition, more than one-quarter (26%) of advisers reported that clients are still not sure what the new regulations mean for them.

The most challenging tasks for 403(b) plan sponsors to get into compliance with the new rules are vendor searches and getting information sharing agreements (ISAs) in place with vendors. The majority of respondents to the survey plan to use just one vendor for their plans going forward, but while that simplifies the issue of ISAs, it could certainly increase the pressure to select the right vendor.

Among advisers responding to the survey, the average number of vendors currently used by their plan sponsor clients is nine. Of those who currently have more than one vendor, almost half (45%) are moving to a single vendor program. In addition, a nearly identical proportion of sponsors responding to the survey are adopting a single vendor program going forward.

Challenges cited by plan sponsors in the vendor decision include: getting inaccurate or incomplete information from existing vendors, dealing with vendors that do not want to give up existing relationships, and knowing how to treat old "orphaned" vendor contracts for which no new contributions are received. Just 22% of plan sponsor respondents said their ISAs were in place, while the average percentage of adviser clients with ISAs completed is 38%.

In spite of their plans to pare down on vendors, 77% of sponsors reported they have not begun a vendor search. However, on the adviser side, one-in-five reported all their clients who were conducting searches have completed them. One adviser reported it is a challenge to find investment providers comparable to the big players in the 401(k) market.

The survey indicated that providers that offer asset-allocated funds, such as target-date or risk-based funds, are a big target of vendor searches. Two-thirds of advisers said all of their clients are considering offering target-date or risk-based investments to participants going forward, and 88% of sponsors responding to the survey said they are considering these fund types.

Aside from the search for investment providers, 20% of advisers reported that all of their clients that currently administer their 403(b) programs in house are planning to rely on a third-party administrator (TPA) going forward. More than half (55%) of plan sponsors indicated they will be using a TPA.

The other challenging task for those plan sponsors that do not have Employee Retirement Income Security Act (ERISA)-governed plans, is getting a written plan document in place. Many undoubtedly are waiting until they have selected vendors; however, in this area adviser-led plans appeared to be at a temporary disadvantage; 55% of plan sponsors reported they already have their written plan document in place, while on average, just 30% of adviser clients have theirs in place.

Sponsors have a choice of drafting (or having drafted) a new written plan document, using existing communications and vendor contracts to comprise a plan document, or a combination of both. Among adviser clients, the majority (55%) are drafting new documents, but among sponsors, the majority are using existing documentation.

Only 22% of sponsors reported they had drafted new written plan documents, and 11% said they are using both existing and new documentation.

Looking Ahead

As they should, many plan sponsors and plan advisers are not only dealing with steps to get into compliance with the new rules, but are considering challenges that lie ahead. Advisers reported it has been a challenge for sponsors to work on consolidation of payrolls, and some sponsors, in addition to efforts to meet the compliance deadline, are also preparing for the new Form 5500 reporting requirements.

One optimistic plan sponsor that reported cutting it close to meeting the compliance deadline expressed the hope for a deadline extension. However, while an extension has been requested by one industry group, the basis for that hope is as yet unfounded, so sponsors would do well not to assume. The time to act on 403(b) compliance tasks, if not started already, is now!