Opinions May 12, 2009

403(b) Sponsor Role in Participant Investment Education

May 12, 2009 (PLANSPONSOR (b)lines) - Now that the IRS final 403(b) regulations are generally effective, public school and 501(c)(3) organizations are more involved in the operation of their 403(b) plans. However, the role of a "403(b) sponsor" is still evolving, including whether an employer's new hands-on role translates to employee education and information about product vendors under their 403(b) plan.

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According to the final regulations, a participant’s investment choices are determined by the vendors the employer chooses to make available under the 403(b) written plan. Specifically, a 403(b) sponsor needs to identify those vendors which are authorized to receive ongoing contributions. As a matter of plan design, an employer may also give participants the ability to move their 403(b) accounts to a vendor, which though not approved to receive contributions, has entered into an information sharing agreement with the employer. Of course, these vendor lists are “living documents” and the employer needs to maintain and update them as appropriate.

In some cases, a participant must have a choice among multiple vendors. Some states’ laws require a specific number of vendors — or, alternatively, any vendor that fulfills certain statutory minimum requirements –for its K-12 public school 403(b) plans. If the employer is a 501(c)(3) organization seeking to maintain its 403(b) plan’s non-ERISA status, then Department of Labor (DOL) guidance dictates that the 403(b) plan have a reasonable choice of investments available to participants.

While a 403(b) plan must identify vendors, IRS guidance does not address participant investment education. DOL guidance on an employer’s provision of employee investment education is currently limited to ERISA 403(b) plans that have elected to fall within the ERISA 404(c) safe harbor. The ERISA 404(c) regulations provide that an ERISA 404(c) plan must provide participants with the opportunity to obtain “sufficient information to make informed decisions with regard to investment alternatives under the plan.” Such information includes a description of those investments, the investment objective, the risk and return characteristics, and prospectuses or prospectus summaries, as well as other specific information if requested by the participant. And DOL Interpretive Bulletin 96-1 describes how investment education can be provided to an ERISA 404(c) plan without being considered “investment advice” that could give rise to fiduciary status.

Does that mean that investment education should be limited to participants in ERISA 403(b) plans sponsored by 501(c)(3) employer sponsors who have elected to operate them under ERISA 404(c)? Not in the slightest. For public schools, state law may provide guidelines. If an investment offering is a registered product, securities laws would require that a participant receive prospectus documents.

As a best practice, a 403(b) sponsor should consider selecting only those vendors that are committed to helping educate plan participants. Sponsors should ask vendors what means of employee financial education are available.

A quality vendor that is committed to the success of an employer's 403(b) plan will recognize that not all employees process information identically and will offer a variety of services, including:

One-on-one meetings with financial professionals to discuss and develop a retirement strategy;
Interactive tools designed to help employees view their 403(b) retirement savings in the context of all other retirement plans in which they participate. This is particularly useful for public school teachers whose retirement planning should take into account the projected benefit from their state or local retirement system; and
Educatory group seminars, to cover a range of topics, from investment basics to preserving retirement income as employees approach the end of their careers.

Vendors are key to the success of an employer's 403(b) plan. As such, a sponsor should seek out vendors that appreciate the role of education in helping 403(b) participants maximize their retirement savings.

- Linda Segal Blinn, JD, Vice President of Technical Services, ING

(This material was created to provide accurate information on the subjects covered. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document. The taxpayer should seek advice from an independent tax advisor.)