403(b)s: Plan Compliance and Plan Design are Connected

February 11, 2011 (PLANSPONSOR (b)lines) - “Compliance coordination” is a term that has special importance to 403(b) plans today, in part due to changes made in the final 403(b) regulations prohibiting a plan sponsor from relying solely on certain participant certifications in order to satisfy compliance requirements which apply across all accounts in the sponsor’s plan.

The rules do not, however, direct the plan sponsor as to how to perform such coordination, leaving plan sponsors the task of sorting through the volume of sometimes conflicting information and guidance in the marketplace. What are some of the compliance coordination challenges that the 403(b) regulations present to single provider plans; multiple provider plans with certain restrictions on one or more of the approved providers; and other multiple provider plans?  

This can be an important question for any 403(b) plan sponsor, whether they are seeking to either increase or decrease the number of providers, or to make no changes at all.  Decisions can be driven by various factors, including employee preferences, employer preferences, potential employer liability, collective bargaining, and more. Whatever the particular reasons, however, all three of the above plan configurations require coordination across multiple accounts for the same participant, particularly for loans and hardship withdrawals.    

For a true single provider plan, that coordination should simply require coordination of multiple accounts for the same participant with that provider.   Such coordination could be easily performed on the recordkeeping systems of many investment providers and third party administrators.  

The number of situations where a plan sponsor today could convert a multiple-provider plan to a true single-provider plan in 2011 can be very limited.  First, such a change would require de-selection of a provider.  Second, it would require either the employer’s desire (and authority) to move existing assets to the surviving provider, accepting any potential challenges or liabilities that might follow such a decision; or a simultaneous decision by all participants to transfer their existing account balances to the selected provider.    

If these requirements are not met, some assets will remain with one or more deselected providers, and the plan would fall into one of the two remaining categories, requiring some form of compliance coordination.  

In determining which accounts need to be considered part of the plan, certain grandfathered contracts, as well as contracts identified in IRS guidance as excludable, could be disregarded.  The grandfathered accounts may include certain accounts established in a Rev. Rul. 90-24 transfer prior to September 24, 2007.  The excludable accounts might include, for example, accounts with providers deselected prior to 2005.  In the case of a non-ERISA 403(b) plan, if such grandfathered and excludable contracts were the only remaining accounts in addition to those maintained by the single active provider, then the plan could be treated as a single provider plan.

A multiple provider plan with a single provider receiving new contributions would require coordination across all providers for loans and hardship withdrawals.  The deselected providers generally are referred to as “frozen providers.”  The marketplace has developed data exchange standards to collect and coordinate data elements critical to loan and distribution compliance without creating a fully redundant recordkeeping system.    

Some systems are highly automated.  For example, some systems offered by investment providers allow the plan-level coordination to occur online, regardless of the provider with which the participant maintains an account, and leave the collection of supporting documentation to the investment providers.  Other systems, maintained by both providers and TPAs may insert themselves more substantially between the participant and the provider maintaining that participant’s account.  Some of those are more resource intensive, and in some cases may collect information only on an as-needed basis, for each requested transaction.    

Decisions by plan sponsors may seek to minimize the need for coordination, although with some important constraints, and to balance costs and benefits: 

  • Some may seek to limit coordination to loans and hardship withdrawals – two transactions which truly require plan level data coordination – while others may extend such coordination to additional transactions such as distributions upon attaining age 59 ½, or upon death or disability, and even QDROs.   
  • A plan sponsor might decide to limit new loans to the provider that was permitted to receive new contributions.  Unfortunately that can still fall short because information about existing loans from frozen providers would need to be obtained and coordinated in order to verify compliance with applicable limitations.   
  • Similarly, disallowing hardship withdrawals from frozen providers alone could not by itself ensure compliance, because data from the frozen accounts would still be needed to verify compliance for a financial hardship withdrawal.   
  • An imperfect solution in both cases might be to obtain a snapshot set of data from the deselected investment provider(s).  It is an imperfect solution because data changes over time – grandfathered 12/31/88 balances might be distributed, loans may be repaid or go into default (in the latter case that would result in significant limits on the availability of new loans), account values may increase or decrease, etc…   


A plan with multiple active providers presents the same coordination requirements as a plan with one or more frozen providers (previous category). Such a plan would also require coordination across providers, using one or more of the options described earlier, although active providers may be more willing to work with the plan sponsor than frozen providers.  

The plan sponsor’s objective (i.e. to simplify plan administration or to continue offering plan participants the choices they had previously) is the critical component of any plan design decisions, and compliance requirements, though clearly important, are a close second. 


Richard Turner serves as Vice President and Deputy General Counsel at VALIC. He was recently appointed to the U.S. Department of Labor ERISA Advisory Council and is a contributing author of the “403(b) Answer Book.”