403(b) Plans, Post-Final Regulations – A Work in Progress

February 17, 2012 (PLANSPONSOR (b)lines) - Ice the bubbly and line up your designated drivers; we will soon be celebrating the fifth anniversary of the publishing of the final 403(b) regulations!  This article will try to address whether all the commotion has been worth it.

Structure is something that needs to be balanced.  Too little and you have the Wild West.  Too much and some employers will stop sponsoring plans.  Reasonable structure can make plans more effective for their participants, and the final regulations provided an incentive and a pathway in this direction. 

On balance, we’re of the opinion that most of the time, money and stress were worth it.  At the time the new regulations came into effect, in aggregate, 403(b) plans held something on the order of $300 billion of life savings for the employees of non-profit organizations.  While many employers did a fine job managing their plans, it is probably fair to say that many more were well intentioned, but… 

In our experience, most employers want to “do the right thing” by their employees.  It’s in our nature, and it makes good sense.  But, many employers wear many hats and wrestle between divergent priorities.  The final 403(b) regulations catalyzed the professionalization of 403(b) plans, by necessitating their escalation on the priority list. 

Surveys show that some 403(b) plan sponsors still don’t know whether their plans are subject to ERISA, whether they are fiduciaries, and what their responsibilities are.  The numbers are dropping and this can largely be credited to the final regulations.   If their own service providers haven’t clued them in, plenty of cold-calling advisers are spreading the word. 

And, what’s the big deal? Prudence would dictate that a plan holding workers’ life savings probably ought to have a document spelling out the terms and conditions; that the financials should be organized enough to be reported on a Form 5500; and if it’s big enough, an audit is a sensible protection.   

Fiduciaries have always been required to act prudently.  Now, because of the final regulations, it’s a little more clear who’s a fiduciary. 

We believe the final regulations have saved employers and participants a lot of money.  True, substantial money is now being diverted to legal and accounting expense, but a broader awakening has transpired that has led to pencil sharpening that we suspect has saved many more times than the regulations’ costs.  It’s difficult to quantify, but we believe that vendor concessions and provider changes have led to meaningful on-going cost improvements.

While the belts may be tighter, some administration is still too loose – The IRS reports that the most common deficiencies they are uncovering in 403(b) plans include issues with: 

  • Universal availability 
  • 15-year and age-50 catch-ups 
  • Written plan documents 
  • Controlled group rules 
  • Section 415 contribution limits 
  • Post-severance compensation 
  • Loans, hardships and other distributions 

More information can be found at: http://www.irs.gov/retirement/article/0,,id=206498,00.html 

What to do, if your plan is not yet finely tuned – Take inventory of where you stand.  You may be able to do this on your own from checklists or knowledge you gain through articles, seminars or elsewhere.  The downside of that approach is that it is time consuming and you won’t really be certain at the end of it that you checked everything.  At the very least, you might want to get a second opinion after you have completed your own work. 

Another approach would be to hire a qualified independent retirement plan adviser to review your plan and make suggestions.  If warranted, they may refer you to the compliance people at your plan’s administrator or recordkeeper or to a qualified attorney. 

Whatever way you go about it, you should definitely fix any mistakes that are uncovered. An examiner is likely to take your good faith efforts into account if they uncover problems during an exam.  More guidance is available all the time, and corrections programs can help you get back on track.  

In summary, the professionalization of 403(b) plans is a good thing for plan participants and likewise for employers.  The final 403(b) regulations  provide a reasonable amount of structure and incentive to manage the plan prudently so as to better serve the participants’ interests.   

Jim Phillips, President, and Patrick McGinn CFA, Vice President, Retirement Resources 


Patrick and Jim have over 50 years of combined investment and retirement plans experience.  Retirement Resources in a Registered Investment Advisor that helps employees retire with greater security, while helping employers manage workload, costs and fiduciary liability. 



NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.