Fiduciary Fallout – When Do 403(b) Plan Sponsors Cross the Line?

August 20, 2008 ( - Internal Revenue Service regulations for 403(b) plans mean greater plan sponsor involvement in the administration and monitoring of their plans, but when do those sponsors with plans not governed by the Employee Retirement Income Security Act (ERISA) need to worry about crossing the fiduciary line?

Speaking to attendees of The SPARK Institute’s 403(b) Plans Issues & Answers Forum in Austin, Texas, Lynn Bahler Knight, Senior Advanced Markets Consultant, ING, said confusion over fiduciary functions results from IRS rules that seemingly conflict with Department of Labor requirements to meet the ERISA safe harbor requirements for non-church 501(c)(3) organizations. For example, she noted the safe harbor requires that participation be voluntary, that sponsors have limited involvement in participant transaction decisions, and that the sponsor provide a reasonable choice of investments, which many fear conflict with decisions to implement automatic enrollment into their plans, decisions on features (loans, hardships) to include or not include in the written plan document, or decisions to pare down to an exclusive vendor for plan investments.

According to speaker Evan Giller, Partner, Giller & Calhoun, the DoL said in Field Assistance Bulletin 2007-02 (See EBSA: 403(b) Programs Not Necessarily ERISA Plans ) that compliance with 403(b) regulations will not necessarily make sponsors subject to Section I of ERISA. Though the DoL said it will make determinations on a case-by-case basis, in the FAB it laid out some clear guidelines on what it considers permissible employer functions and discretionary employer determinations. Actions that require sponsors to exercise discretion will cause a plan to fall outside of the ERISA safe harbor, Giller pointed out.

Why do sponsors fear falling outside of the safe harbor? Because, as Giller notes, fiduciary functions for plans that are or become subject to ERISA include:

  • Expanded Form 5500 reporting requirements,
  • Bonding of 10% of plan assets or up to $1 million,
  • Providing for spousal consent on plan withdrawals,
  • Expanded participation and vesting rules, and
  • Additional reporting requirements (i.e. summary plan description, summary of material modifications, and summary annual report).

In their presentation, Bahler Knight and Giller offered listings of allowable sponsor functions in order to retain ERISA exemption as well as employer determinations that could cause a plan to fall out of the ERISA safe harbor.

Permissible Employer Functions

  • Perform administrative plan reviews,
  • Implement necessary corrective action steps,
  • Improve plan's administrative processes,
  • Coordinate corrections with necessary third parties (i.e. IRS corrections programs),
  • Maintain plan activity records,
  • Share participant information with vendors,
  • Adopt a written plan, and
  • Perform periodic compliance reviews of plan documents.

Discretionary Employer Determinations

  • Authorize plan-to-plan transfers,
  • Process distributions,
  • Comply with spousal consent requirements,
  • Determine and approve hardships, QDROs, loans, etc., and
  • Negotiate terms of products with vendors.

Giller conceded that the DoL's guidance still left some unanswered questions on crossing the fiduciary line, but Larry Goldbrum, General Counsel, The SPARK Institute, said the Institute has asked the department for more guidance on issues such as:

  • Employer selection of funds,
  • Selection of optional plan design features (i.e. hardships, loans),
  • Mapping funds to a new vendor,
  • Matching contributions made to a 401(a) plan,
  • Fulfilling the "reasonable choice" of investments requirement, and
  • The use of group custodial accounts.