The New World of 403(b) Retirement Plans

According to Lisa Murphy, ERISA Advisory Services, MassMutual, new regulations that have impacted plan administration for ERISA and non-ERISA sponsors include the requirement to have a written plan document, and that approved investment providers must be named in the plan. The universal availability rule change limits employees that can be excluded. In addition, non-ERISA plans now have a deadline to submit employee contributions. The guideline is to deposit those funds by the 15^th day of the month following the deferral of contributions, Murphy noted.  

In addition, under the new regulations, a plan termination is now a distributable event. Sponsors of 403(b) plans now have the ability to close out their plans, but individual annuity contracts held by participants create a complication in distributing assets.  

A big change for 403(b) plans noted by Murphy is the new Form 5500 reporting requirement. The regulations now require financial statement information, participant counts, plan audits for large plans, and mandated electronic filing. Sponsors must now seek the services of an auditor/accountant.  

Murphy said to ensure compliance with the final regulations, enable accurate Form 5500 reporting and a smooth plan audit, sponsors should: 

• Confirm whether or not the plan is subject to ERISA; 
• Confirm the plan document was timely executed; 
• Confirm that the terms of the plan document are being followed and coordinate with investment contracts and custodial accounts; 
• Identify who is determining participant eligibility for loans, hardships, QDROs, etc.; 
• Verify that employee contributions are timely remitted to investment providers; 
• Determine the number of “eligible” participants for Form 5500 reporting purposes each year to determine if an audit is required; and 
• If a plan has multiple investment providers, keep records of past and current providers holding contracts. 

Brenda Van, Retirement Services Managing Director, MassMutual, noted that many plan sponsors are in the transition of consolidating vendors to simplify plan administration; however, many public schools (K-12) and large public universities have not committed to single vendor approach. In addition, there has been an increase in the use of advisers, consultants and TPAs for knowledge and expertise. 

 As sponsors exert greater control over plans they are driving down costs, focusing on administrative and fiduciary responsibilities, and investment selection – all tasks that an adviser can help with. Van said 403(b) sponsors are also implementing progressive solutions such as automatic features, target date funds, and bundling services among retirement plans offered to reduce complexity and costs.  

In addition, the new regulations have caused many sponsors to consider plan design – whether a 403(b) or a 401(k) is best for participants – and have made a stronger commitment to employee education. The regulations have created a “great opportunity for plan sponsors to make positive changes to their retirement plans,” Van said.  

Role of Advisers in the New 403(b) World  

As sponsors are seeking out help in the new world of 403(b) plans, David Levine, Principal, Groom Law Group, said advisers can take an active role.  

While advisers aid sponsors with plan design, advisers should remember to connect to other plans of the sponsors, as more assets may help them be able to obtain pricing leverage with providers, and it will help in the design of sponsors’ overall retirement strategy, according to Levine.   

Advisers should also help sponsors know their fiduciary roles and adviser should know their own fiduciary role. Levine noted that the Department of Labor expanded the definition of fiduciary; if advisers help select investments or investment managers, they can be considered a fiduciary. Advisers should make sure all documents relating to the plan clearly name who is a fiduciary, Levine advised.  

Advisers should take note that there are fewer providers in the 403(b) business because the regulations caused consolidation. They may find old vendors aren’t even in the business anymore. If helping sponsors choose investments and investment providers, Levine said advisers should be careful with non-traditional investment options and funding vehicles because there are restrictions for 403(b) plans.  

In addition, there is a balancing act between complying with new regulations while also dealing with old individual contracts for which participants only have control. Levine said advisers should consider these old contracts when helping sponsors with vendor selection. Vendors can’t promise that old assets can be moved, and having the baggage of old funds can affect pricing.  

Since many employers are just starting a relationship with participants, Levine said advisers can help with communication and education. In addition, sponsors will need help with fee disclosure regulations.