Nicholas Zaiko
Investment Consultant
Bridgebay Financial, Inc.
Defined Contribution Plans Converge
In many respects a 403(b) plan is very similar to a
401(k) plan. They both provide tax
advantaged savings vehicles for employees, the major difference being the
groups of employees. 403(b) plans are
specifically designed for the employees of nonprofit organizations while 401(k)
plans apply to employees of for-profit organizations. Another major difference has been the level of
regulation imposed on these two types of plans.
That difference however, is shrinking as recent IRS regulations have
been pushing 403(b) sponsors to streamline administrative functions and take a
more active fiduciary role in their plan.
A recent survey conducted by the Plan Sponsor Council of America (PSCA)
revealed that the number of non-ERISA compliant 403(b) plans is shrinking as
plan sponsors adopt ERISA compliance, in light of increased regulation.
Plan Enhancements
403(b) plan sponsors are realizing that a
multi-provider, open-ended plan may not be the best type of arrangement for
their participants. While many believed
this type of open arrangement absolved the sponsor of fiduciary responsibility,
it is now clear that regulators do not believe that participants should be left
to fend for themselves. A 403(b) plan
with multiple service providers has no consistency of message, education or
investment products. The IRS and DoL
requirements on 403(b) plan sponsors, similar to those that have existed in the
401(k) market for years, provide an integrated retirement plan.
Fortunately, 403(b) retirement plan sponsors have
the ERISA-covered 401(k) plan model to help them comply with ERISA regulations
and emulate the best practices and plan features in the 401(k) market. Some of these enhancements include automatic
enrollment, refining the core fund menu, consolidating service providers and
improving and unifying the participant education and communication programs.
Fiduciary Responsibility
Evolving 403(b) regulations have required reporting
on a plan basis and compelled 403(b) plan sponsors to take on more
responsibility as fiduciaries of the plan.
As fiduciaries, employers may retain a retirement plan advisor as
co-fiduciary to provide independent advice on the selection of plan providers,
operation of the plan, participant education and investments available to
participants. An independent advisor
assists the fiduciaries in implementing best practices and developing a prudent
due diligence process in overseeing the plan. As in the 401(k) market, the
employer negotiates with the plan sponsor on behalf of the participants,
minimizing the potential for unsophisticated individuals to be taken advantage
of by opaque and costly arrangements.
ERISA compliance also provides that the DoL and IRS with additional
authority to oversee 403(b) plans. The
regulators want to see plan sponsors taking a much more active role in
monitoring and overseeing the plan.
This additional oversight is similar to the
requirements of a 401(k) plan and so an easy way to achieve this level of
compliance is simply to establish the same type of due diligence process which
is common in the 401(k) plan environment.
The solutions and best practices already exist so 403(b) plan sponsors
can source the experience and knowledge of experts in the 401(k) industry and
apply best practices to their 403(b) plan.
Proper Documentation
Many plan sponsors successfully met the December
31, 2009 deadline to draft, approve and adopt a written 403(b) plan
document. This however, is only part of
the requirement. The IRS is also looking
to see that the plan is in fact being operated in accordance with the plan
document. As part of their audit, the
IRS may seek information from the payroll and human resources department to
validate the operation of the plan.
Deviations from the stated plan document could highlight deficiencies
with either the plan document or the plan administration. As part of an annual review, be sure you can
produce the 403(b) plan document and that it is consistent with the day-to-day
operations of the plan. Additionally,
ensure that the plan document is consistent with the summary plan document
(SPD) which is given to the plan participants.
Focusing on Participants
Many 403(b) plans that have successfully
transitioned to ERISA compliance now find themselves in the enviable position
of refocusing energy away from compliance and on to participant outcomes.
Plan sponsors are increasingly adding plan
options such as target-date, target-risk and other investment vehicles designed
to increase their participants' chances of reaching their retirement
goals. Administrative enhancements
achieved by consolidating providers and streamlining operations free up
valuable internal resources that can then be redeployed to enhance plan
participation and participant education.
Conclusion
Though the challenges of bringing your 403(b) plan
up to ERISA standards may seem imposing, take comfort in the knowledge that the
solutions already exist and that once the transition has been completed,
maintaining a properly documented due diligence process will yield numerous
benefits to both the plan sponsor and the participants. The most obvious benefits include reduced
plan costs, enhanced participation, improved participant education and
streamlined plan administration.
