(b)lines Ask the Experts – Managing Vendors Outside a TPA Arrangement

(PLANSPONSOR (b)lines) – A representative to public educators notes that many public school employers eliminated low-cost 403(b)(7) options when choosing their compliance solutions to the new regulations.

The representative asks: “Is it possible for a public school employer to use a TPA solution for its 403(b) providers while still allowing for employees to continue with a low-cost 403(b)(7) provider (like Vanguard) as long as this option requires that the employees can only use this one option and are not allowed to take out any loans – so that recordkeeping is limited to abiding by the annual maximum contribution?”

Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, says:

The final 403(b) regulations do not place any limitations as to the number of vendors that may be offered in a 403(b) plan. However, additional vendors, as you imply, adds complexity to compliance with the final regulations, due to the requirement that certain transactions, such as loan availability, be coordinated among vendors. Presumably the TPA, in your scenario, provides that function, but since the low-cost provider is operating outside of the TPA structure, the TPA is not coordinating transactions with that vendor.  

Eliminating the loan provision from the low-cost vendor custodial agreement/contract (which may or may not be possible, depending upon the vendor) would partially address the compliance issue, but there are many other transactions that require vendor coordination, such as hardship distributions and minimum required distributions, some of which cannot be eliminated from a contract. In addition, the low-cost vendor will still require confirmation by the employer or TPA of eligibility for distributions. Thus, the school district would likely incur an additional cost associated with coordinating information for vendors operating outside of the TPA structure.    

Another difficulty with offering the low-cost provider in this scenario is that the contract with the TPA may preclude offering any vendors other than those who are a party to the TPA arrangement. Even if the TPA contract permits additional vendors, pricing for the TPA’s services may be negatively affected, especially if the TPA derives revenue from the vendors who are a party to the TPA arrangement.

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.