The New 403(b) Environment

January 7, 2011 (PLANSPONSOR (b)lines) - As we begin a new year, it is a good time to take stock of where 403(b) plans are, now two full years after the effective date of the regulations and one year after the December 31, 2009, deadline for implementing a written plan.

The world of 403(b) did not collapse under the weight of the new requirements – quite the contrary, it seems to be thriving.  Early warnings that all 403(b) plans were now subject to Title I of the Employee Retirement Income Security Act (ERISA) – even public employer 403(b) plans – were quickly recognized as incorrect.  Some of the confusion may have arisen from the universal requirement of adopting and maintaining a written plan.    

For private tax-exempt employers sponsoring 403(b) plans, existing ERISA 403(b) plans may have required few changes, while safe harbor 403(b) plans required careful attention regardless of whether they elected to try to retain the ERISA safe harbor, in which case Department of Labor guidance, both formal and informal, provided some assistance in determining the outlines of permitted employer involvement; or accept prospective ERISA status for the plan, recognizing important potential limits on plan sponsor discretion under the accounts and contracts, under the investment arrangements.  

Plan sponsors, investment providers and additional plan service providers have marshaled significant resources to respond to the regulations in a myriad of ways. Some elected to move forward with a single provider for new contributions, but also recognized (hopefully) that they still had certain obligations to include all providers deselected after 2008 and if the providers were cooperative, many of the providers deselected after 2004 and before 2009.    

Many others continued to maintain plans with multiple active providers, for various reasons, including:   

  • requirements under state law or under collective bargaining agreements; 
  • a recognition of employee preference, and/or a desire to provide employees a choice of service models; 
  • to avoid potential fiduciary concerns (non-ERISA) arising from selection of a single provider. 


In many cases, plan sponsors reduced the number of active investment providers through an RFP or similar process designed to evaluate not only plan compliance capabilities, but also important additional considerations such as product and service fees and associated services.  Such efforts may have succeeded in not only reducing fees to plan participants, but also better preparing those plans subject to Title I of ERISA for new fee disclosure requirements.  

Plans with multiple active and/or frozen providers have several options in the 403(b) marketplace for addressing the critically important task at the heart of the regulations, coordinating compliance across multiple accounts for the same participant for loans and hardship withdrawals.Moreover, some of those compliance solutions have extended beyond those transactions, where such coordination is truly necessary, to additional withdrawals upon severance from employment (confirmation required), upon reaching age 59 ½ (or other plan-imposed distribution age), per qualified domestic relation orders (QDROs), or at disability or death.  

There are also significant variations among these compliance solutions, ranging from fully manual processes for reviewing paper forms and documentation, to processes which split the compliance into two distinct components:   

  • partially or fully automated solutions for evaluating plan-level compliance (across providers and accounts), and 
  • account-level compliance performed by each investment provider. 


The costs for these various options may be dependent upon multiple factors, including the extent to which processes are manual or automated, and whether the services are provided by an investment provider or a third party.

In the process of implementing or modifying their written plans and their related compliance coordination procedures, 403(b) plan sponsors were reminded of another critically important topic that has been a significant focus of IRS field examiners as well as the Employee Plans Correspondence Unit: universal availability of the right to make elective deferrals.  A failure to comply with this requirement can have adverse plan-wide consequences.  The advent of the written plan requirement places the issue under a spotlight.  Any examination of compliance with universal availability would likely start with how the written plan defines eligibility: if that description is not correct, then there are at least two possible adverse outcomes:   

  • the plan has failed in operation because it followed the flawed plan terms; or,  
  • the plan has complied with universal availability but failed to comply with its own terms. 


The latter possibility might be avoided by applying the paper clip alternative, set forth in the regulation provision establishing the written plan requirement, to consider additional (and correct) plan procedures a part of the written plan, provided that those procedures were established by a party authorized to define or amend the plan.  Of course, the preferable approach is to correctly describe eligibility requirements in the plan in the first instance.  

Plan sponsors also have needed to consider the further guidance provided in the final regulations regarding contribution limit coordination that includes plans of outside employers controlled by a participant in the 403(b) plan sponsor’s plan.  Control of the outside employer is a key factor in determining whether, and to what extent, the coordination is required.  Plan sponsors quickly recognized, of course, that in some cases the best that they may be able to do is educate their employees about the requirement and its limitations, and request the relevant information.   

Finally, private sector 403(b) plan sponsors must consider additional ERISA requirements that apply (or that may apply) to those plans.  Those plan sponsors have seen additional new developments coinciding with or following after the final 403(b) regulation effective dates, including: 


  • Significantly expanded reporting on Form 5500, necessitating, among other things, a clear determination of which contracts are required to be included in the reporting.Department of Labor guidance on this particular determination generally was more restrictive than IRS guidance in Revenue Procedure 2007-71, permitting pre-2009 contracts and accounts to be excluded if either: 
    •  they have already been distributed from the plan; or,  
    • the participant possesses authority to obtain distributions directly from the contract or account without the approval of another party, such as the plan sponsor or a third party designated by the plan sponsor. 
  • New fee disclosure requirements, requiring detailed disclosures: 
    • by covered service providers, to the plan fiduciary; and 
    • by the plan fiduciary (on its own or with the assistance of service providers) to employees in participant-directed defined contribution plans. 


Additional IRS and DOL guidance may provide further clarification regarding requirements applicable to 403(b) plans.  In the meantime, however, the plans continue to function and to thrive. 


Richard Turner serves as Vice President and Deputy General Counsel for VALIC. Turner has worked extensively with retirement plans and products for 25 years and is a frequent speaker on the topic. He was recently appointed to the US Department of Labor ERISA Advisory Council and is a contributing author of the “403(b) Answer Book.”