Those regulations required plan sponsors to maintain a written plan document, adhere to specific audit requirements for plans with more than 100 participants, and adopt a new focus on fiduciary governance. Those that expected change were correct, but the change took longer than many experts originally thought.
To take this a step further, while many experts predicted the adoption of a written plan document would spur nonprofit plan sponsors to form oversight committees, review fees, and initiate changes to fund lineups and recordkeepers. In actuality, it was the audit process that has taken a more central role in motivating a 403(b) sponsor to initiate much of this work.
In establishing appropriate oversight, plan sponsors have charged Audit Committees, typically composed of ‘outside’ trustees, with the task of serving as fiduciaries to these plans. Interestingly, many of these committee members/trustees come from the corporate world where they are familiar with the comparable 401(k) plan and understand the implications of acting as an ERISA fiduciary.
As a response to the long list of fiduciary responsibilities that Audit Committees are now charged with, committees in many cases are turning to internal management at their respective non-profits to form dedicated “403(b) oversight committees.” These subcommittees are put in place to formalize governance, review recordkeeping vendors to assess plan structure and investments, and to analyze fee & revenue arrangements that are embedded within plans.The progression of events detailed above, from the release of 403(b) regulations in 2007 to today, have spawned several best practices in the industry. In most cases, these best practices were first adopted in the private sector, as a part of 401(k) oversight. For 403(b) plan sponsors, many are finding that by understanding and adopting a “401(k) approach” to their plan, they not only mitigate much of the fiduciary risk they have assumed, but they also build better plans for their participants.
Best Practices in the 403(b) Oversight Process
The following is a brief overview of some of those best practices that plan sponsors are incorporating into the 403(b) oversight process:
- Adopting a committee charter / investment policy statement: The committee charter codifies who is on the committee, the roles and responsibilities of the committee, and the process by which the committee will vote on items that are under its oversight. The IPS helps to document the process by which investments are made and monitored, and clearly defines the roles and responsibilities of those involved in investment oversight.
- Understanding investment arrangements: It is important that committees understand the contractual relationship the plan has with the recordkeeper, any third party administrator (TPA), and any investment options offered to participants. From an investment standpoint, many 403(b) platforms offer investment options that may be structured as separate contracts between the individual participant and the investment provider. Many may take the form of individual annuity contracts. It is critical for the committee to thoroughly understand the terms of these contracts. The question of who has the authority to initiate the movement of plan assets should be examined as well. Moreover, liquidity provisions at the participant level may vary in many of these contracts and should be fully understood also.
- Reducing the number of investment funds in the plan: As ERISA fiduciaries, the committee is tasked with performing due diligence on investment options and making sure they are competitive from a fee and performance standpoint. On an ongoing basis, the committee is responsible for monitoring all funds to ensure that they continue to be viable options. Too many fund options creates a cumbersome monitoring process and one that is susceptible to risk. A long list of investment options can also cause participant confusion and reduce participation in the plan due to “choice overload,” the outcome of which is participants deferring (or putting off entirely) their investment decisions. We recently worked with a higher education client in which we helped narrow the number of funds from over 200 options to approximately 20, a number that is more in line with the average 401(k) plan.
- Evaluating Single vs. Multiple Vendor Arrangements: Another difference between 401(k) plans and 403(b) plans is the issue of single versus multiple recordkeepers. It is very common in 403(b) plans to have multiple recordkeepers and investment providers. This is rarely, if ever, seen in the 401(k) arena. Committees must weigh the benefits of a multiple vendor arrangement versus its weaknesses. The potential for increased audit fees, participant confusion and more challenging administration need to be considered.
- Assessing investment and plan fees: Fees are a critical component of a successful retirement program. They are, arguably, more opaque in 403(b) plans than 401(k)’s due to the aforementioned prevalence of individual annuity contracts. Plan sponsors are held to the standard of a prudent expert under ERISA. If they cannot document reasonableness of fees, through a process of benchmarking, they are not fulfilling their fiduciary duties.
These are just a few of the important items that newly formed committees must consider. Due to the somewhat daunting task of carrying out these responsibilities alone, many plan sponsors find solace in turning to outside experts to help them navigate the process. It is tough to argue that a committee working alone to fulfill its fiduciary roles would have an easy road ahead of it.
Jeff Capone, Investment Consultant, Fiduciary Investment Advisors
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.
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