(b)lines Ask the Experts – Difference Between 403(b) and 401(k) Vendor Contracts

“One of my first responsibilities was to review our existing vendor contracts. Much to my surprise when it came time to review our Employee Retirement Income Security Act (ERISA) 403(b) plan, our vendor indicated that such contracts didn’t exist! They indicated that they have contracts with the plan participants, but not the employer. Could this be possible? For my prior employer’s 401(k) plan, we had a trust agreement, recordkeeping agreement, and service agreement. It strikes me as odd that a 403(b) plan would have none of those things. Am I being unreasonable in my expectations?” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:

First of all, allow the Experts to welcome you to the exciting world of nonprofit retirement plans! Such a world can be quite exciting and challenging, and we see that you have already stumbled across one of those challenges; namely, 403(b) vendor contracting, which can be quite different than what you are used to in the 401(k) world.

First of all, 403(b) assets are rarely invested in a trust, so that should be a valid explanation as to why you do not possess a trust agreement for a 403(b) plan. Instead, 403(b) plan assets are invested in fixed/variable annuity contracts under Section 403(b)(1) of the Internal Revenue Code, or in custodial accounts (more commonly known as mutual funds) under Section 403(b)(7) of the Code. Such contracts can be individual (where the individual employee is the contract holder) or group (where the plan sponsor/employer is the contract holder) in nature.

It appears from your questions that your plan has individual contracts (note that a previous Ask the Experts column analyzed the distinction between such contract types in detail); however, you can request that the vendor provide copies of the specimen (sample) version of such contracts. A specimen contract will contain many items that you will be used to reviewing from trust agreements, such as fees, rights, and termination provisions. You also want to make certain that the contract language is consistent with the terms of your plan document, so obtaining this contract for review is essential.

As for the other agreements that you cite (recordkeeping agreements and service agreements), they exist in the 403(b) world as well, though admittedly the Experts have come across situations were recordkeeping and other services were being provided, but no contracts were in place. Depending on the plan structure, this result may not desirable. So if such contracts are missing in your case, and recordkeeping and/or other services are being provided, you should might consider whether it is necessary to press your service providers to enter into such agreements with the plan sponsor/employer.

Thank you for your question!