The IRS-provided remedial amendment period for 403(b) plans ends March 31.
Darin Williamson, vice president, Institutional Services, AIG Retirement Services in Houston, Texas, notes that 403(b) plan sponsors are not required to do anything during the remedial amendment period unless their plan has not been operating according to current plan document terms. He says it is in plan sponsors’ best interest to move to a pre-approved plan document.
For 403(b) plans, other document types include not only individually designed documents but the paper-clip approach, which is an integration of various provider contracts. “We’re trying to push folks to move to a pre-approved plan document. They won’t have to worry about future amendments because those will be taken care of by the document sponsor. With other document types, plan sponsors will have to rely on their legal counsel to be apprised of what needs to be updated and to update the documents. And it’s always a challenge with the paper-clip approach to document how exactly the plan operates,” Williamson says.
“This process allows us to catch up with 401(k) plans; 403(b) plans will have the same restatement program in place as 401(k)s do,” says Mike Webb, vice president at Cammack Retirement Group in New York City. He notes that now, with pre-approved plan documents, 403(b) plans will have language in plan documents that is consistent with operations. “In the post-restatement environment, there will be fewer recordkeeping errors because plan sponsors as well as providers will have documents they understand,” he adds.
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Written plan documents were required to be adopted for all 403(b) plans by December 31, 2009. Richard Turner, associate general counsel with AIG Retirement Services in Houston, Texas, notes that a 10-year remedial amendment period is a long time to track everything that may have changed for plans and when it changed. “In the coming years, we may see issues pop up. For example, a plan sponsor may have made a change to plan loan provisions three years ago, but when it adopted a pre-approved plan, it took the change all the way back to 2010. There may not be a lot of these issues, but there will be some,” Turner says.
He points out that the IRS last year introduced a new rolling two-year remedial amendment period for 403(b) plans. “That’s an opportunity to correct some mistakes made when restating the plan,” Turner says.
Williamson says the remedial amendment period is a great opportunity for 403(b) plan sponsors to consider whether they should add features or change products to help participants join the plan and save for the future.
Going forward, Turner says, plan sponsors should have a regular process for reviewing plan documents to make sure they continue to match plan operations. Plan sponsors can self-correct if they find qualifying defects.
Williamson reminds plan sponsors that if they move to a pre-approved plan document, there will be a six-year restatement cycle, with the next restatement due March 31, 2026.
Once plan documents are cleaned up, and with the new rolling two-year remedial amendment period, Webb suggests it will be good opportunity for 403(b) plan sponsors to considering getting rid of provisions in the plan document that are less understood or create unnecessary administrative burdens. One example is the 15-year catch up contributions allowed for 403(b) plan participants. “Participants rarely use the provision, and it’s difficult for even me to explain, so if it’s hard to explain to participants, one can image how hard it is to administer,” Webb says.
He also suggests plan sponsors consider the definition or definitions of compensation used in their plans. “It should reflect something that can be easily administered,” he says. Webb also thinks plan sponsors will revisit how they count hours for eligibility for employer contributions and vesting, with some moving to equivalencies and elapsed-time methods.
“Making the plan simpler makes the summary plan description [SPD] simpler and more user friendly for participants,” Webb adds.
The next thing 403(b) plan sponsor will have to sort out is which provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act are optional and which are required for them, and what actions they want to take, Turner says.
Plan document amendments related to the SECURE Act will have to be made in the next couple of years. Turner says two provisions specific to 403(b)s relate to 403(b)(9) retirement income accounts and the distribution of custodial accounts when a 403(b) plan terminates. He explains that qualified church-controlled organizations (QCCOs) and non-QCCOs can participate in retirement income accounts. “The IRS will provide more guidance and hopefully extend the provision to pre-approved plan documents,” Turner says.
The IRS also directs the Treasury to create a rule to permit the distribution of 403(b)(7) custodial account assets in kind. Turner says this will help simplify plan terminations.
Other provisions of the SECURE Act apply to all plan sponsors. Turner notes there’s a change in the age for required minimum distributions (RMDs), a change in the rules for distributions to beneficiaries after a participant dies and a requirement for lifetime income disclosures on participant statements. “Lots will happen before the end of the six-year restatement cycle,” he says.
It is important for 403(b) plan sponsors to understand what SECURE Act provisions apply to them. For example, the provision allowing for employers without a common nexus to participate in multiple employer plans (MEPs) does not apply to 403(b)s. But Turner points out that association retirement plans discussed in Department of Labor (DOL) guidance last year are available for 403(b) plan sponsors. The provision mandating that long-term part-time employees be eligible to participate in retirement plans also does not apply to 403(b)s—only 401(k)s.
Williamson thinks some 403(b) plan sponsors will consider the association retirement plan guidance from the DOL. “There will be 403(b) plan sponsors that choose to use economies of scale. They will work with legal counsel to see if these plans are good for them,” he says.
With plan documents cleaned up, Webb says 403(b) plan sponsors can now focus on more strategic tasks, such as improving the plan design to enhance participant outcome. For example, plan sponsors can revisit their loan policies to determine if they need to limit loan utilization.
Webb also says 403(b) plans lag in using automatic enrollment, especially those administered by plan sponsors that have mandatory employee contributions. “They think they can’t or shouldn’t use auto enroll,” Webb explains.
When considering auto enrollment, Turner notes that plan sponsors should make sure there are no state restrictions for doing so.
Webb says he sees 403(b) plan sponsors that are behind on financial wellness initiatives. They should consider offering student loan debt assistance and helping employees establish emergency savings.
Surprisingly, considering the number of 403(b) plan participants who hold annuities, Webb suggests plan sponsors focus on retirement readiness and educating employees about how to efficiently use their assets in retirement. “The annuities are accumulation annuities, not payout annuities. Participants have to choose to annuitize their savings, and most don’t,” he explains.
Finally, Webb says 403(b) plan sponsors need to take a hard look at revenue sharing arrangements among their providers, especially in light of the recent excessive fee lawsuits that have been filed. “We’ve been trying to move clients to zero-revenue sharing products and telling them to not direct any money to annuities that have revenue sharing,” he says.
“State-of-the-art 403(b) plans have found a way to be totally transparent; what providers charge is what participants pay and they see that on statements. With revenue sharing gone, actual fees paid come to light,” Webb says.
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