403(b) Plans: The Senior Management Hurdle

September 16, 2008 (PLANSPONSOR (b)lines) - In the race to meet upcoming 403(b) regulations, sponsors have to clear a number of hurdles. By now you've probably overcome the hardest one: understanding what you need to do to meet the new regulations.
By PS

One major hurdle for many, according to a recent survey conducted by PLANSPONSOR.com, is convincing senior management that steps need to be taken and they need to be taken now.

Why the hurdle?   It is likely due to the experience management has had in operating the 403(b) plan.   Traditionally there have been two different 403(b) models: actively-sponsored and non-actively sponsored.

Actively-sponsored 403(b) plans are hands-on.   Senior management has been engaged all along in policy decisions and fiduciary oversight. This group should be easier to convince that the same oversight will be needed to comply with the final regulations.

The non-actively sponsored 403(b) plan has been in a “hands-off” fashion.   With no policy decisions to be made and no fiduciary oversight, senior management has remained at arms-length, often assigning day-to-day operation to Human Resources and Payroll departments.  

As you know, the final regulations no longer allow a “hands-off” approach. While the plan can still be operated in a non-actively sponsored fashion, senior management will have to be involved in a number of key decisions ranging from developing a plan document to possibly moving to an actively-sponsored approach.   So how do you get them there?

The Benefits  

The first step is to explain the benefits of taking action, which include:

  • Potential cost savings: The regulations provide an opportunity to upgrade the plan and reduce costs.   Demonstrate the possible savings by estimating the hours needed to monitor compliance of the current 403(b) plan under the new regulations versus the estimated costs of the various new alternatives, such as reducing the number of vendors, hiring a TPA, or switching to an actively sponsored plan with a single vendor.   
  • A better benefit: A review of alternatives and their costs will likely lead to an improved program with higher quality 403(b) products and services for all employees, including senior management.
  • Retention tool: Make it clear that upgrading the 403(b) program will increase employee retirement readiness and appreciation of the benefit, which will help attract and retain quality employees.

The Consequences

The next step is to point out the negative consequences of inaction which could directly impact senior management.  

  • Tax bite:   Without changes, the plan will not meet the requirements for deferring taxes provided by Section 403(b).   That means that all account balances, other than those that are grandfathered, could lose their tax-deferred qualified status and become taxable. Senior management would join employees in feeling the pain personally.
  • Disgruntled workforce:   Senior management will have to explain the tax consequence to employees who will likely be very unhappy.

All the Way to the Finish Line

Once you get senior management on board, the best way to keep them there is to make them part of the team.   You're going to need their help to clear the next hurdles; decisions regarding strategy policy and structure as well as process and administration.  

Get them involved by forming a committee that includes members from both senior management and day-to-day administration.   The committee will ensure people of all levels are working together in the same direction.

As a team, you'll have the best shot of effectively implement changes and getting to the finish line: compliance by the January 1, 2009 deadline.  

- Aaron Friedman, National Practice Leader, Non-Profit Consulting, Principal Financial Group

NOTE: This feature is to provide general information only, does not constitute legal advice as part of an attorney-client relationship, and cannot be used or substituted for legal or tax advice.

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