Surviving Form 5500 – for 403(b)s

Form 5500 is an informational filing, similar to an annual tax return, for an employer sponsored plan.   Until 2009, 403(b) plans reported only names, address, and signatures, while 401(k) plans were required to provide full financial disclosure.   For plan years starting in 2009, the reporting requirements for 403(b) plans are the same as for 401(k) plans. In addition, the EBSA has added a fee disclosure schedule to Form 5500, creating even greater reporting complexity.

Now before we go too far, let’s clarify that this is an issue for ERISA plans and in the 403(b) world many plans are not subject to ERISA.   Generally, plans offered by public schools and church organizations, and plans that only allow employee contributions and maintain minimal employer involvement are not subject to ERISA and do not file the Form 5500.*

Unlike a 401(k) plan that typically uses one vendor to provide the investment administration/recordkeeping, 403(b) plans frequently have multiple vendors.   A single plan utilizing more than 50 vendors was not uncommon in the past.   Additionally, many of these investments are in accounts owned by the participant that the employer cannot move.   Thus, employers are forced to continue to work with vendors that are no longer approved in the plan.  

This is a huge change for 403(b) plan sponsors. For plans that went to an exclusive vendor, the job will be much easier, but many plans still allow multiple vendors in their plan and the Form 5500 must consolidate information from each vendor into a single filing.

Additionally, plans with more than 100 employees will require a plan audit. This involves engaging an independent accountant to audit the financial statements of the plan and provide an auditor’s opinion. Not only will this require gathering a lot of information from multiple vendors, but the information requirements are increased because the EBSA requires auditors to compare the 2009 figures to a prior year which means auditors will also need financial data from the 2008 plan year.   How readily available will 2008 financial information be for these 403(b) plans?

Until recently the retirement services industry has been trying to figure out how to deal with old vendors and what the requirements are for reporting on assets with these vendors.   Fortunately, the DoL issued relief on July 20, 2009, via FAB 2009-02 (see DoL Relief on Form 5500 Reporting Requirements for 403(b)s). This is very nice relief that eliminates reporting on accounts the employer has stopped all involvement with prior to January 1, 2009, and where the participant can act without employer involvement.   Unfortunately, assets must be fully vested to avoid reporting, so plans with vesting schedules may still have reporting obligations even with vendors that were dropped from the plan.   Employers with vesting schedules should carefully review this relief and their relationship with prior vendors.

In addition, the reporting relief may add a level of complexity for plan sponsors.   Many vendors have been gearing up to provide the information required on all participants to the plan sponsor and their systems are not designed to eliminate participants described in the relief. This may mean that plan sponsors will receive a mixed bag of information with some vendors providing full information and others eliminating pre-1/1/2009 participants.

The following are some suggestions on what plan sponsors should consider doing now as they prepare for the new requirements:

1. Contact all of their vendors to complete a review of:
   1. The services the vendor will offer (signature ready 5500 services for multiple vendors, financial reports, schedules, etc.);
   2. What assets and participants will be included in the filing;
   3. How they will support the plan's auditor; and
   4. Who will be providing indirect fee information.
2. If the plan has more than 100 employees, contract with an auditing firm now.
3. Work with an auditor and vendor(s) to create an opening plan balance for 2009 and a 2008 statement for comparison.
4. Create a plan for completion and filing of Form 5500 by the July 31, 2010, deadline.

Many vendors, third party administrators, consulting and accounting firms are developing materials to support plan sponsors.   In addition, financial advisers should consider supporting plan sponsors and participants by:

1. Gaining a solid understanding of the Form 5500 requirements for 403(b) plans and knowledge of what firms will be providing to clients;
2. Proactively reaching out to clients to make sure they are receiving what they need from vendors; and
3. Conducting research into how fees will be disclosed to clients for Form 5500 Schedule C and be prepared to respond to clients' questions in regards to investment related fees and commissions.

The need for independent and objective support for 403(b) plan sponsors and vendors has never been greater.

James D. Racine, Lincoln Financial Group - AVP 403(b) Initiatives

Stacy B. Sandler, Deloitte Consulting LLP - Principal

* Please seek legal counsel in determining if your plan is subject to ERISA.

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