An industry group developing best practices for 403(b) retirement plans is coming closer to streamlining these plans to make them even more similar to 401(k) plans, but first they will have to get everyone to agree to speak the same language.
Leaders say the SPARK Institute's work on 403(b) best practices is coming along smoothly, thanks to the cooperative efforts of approximately 50 participating institutions. The latest update, version 1.04, fixes many of these communication issues by requiring a standardized reporting format, which it hopes most institutions will adopt by this July.
"A substantial majority of investment providers are adhering to these best practices," said Larry Goldbrum, general counsel of the SPARK Institute. "This represents a significant percentage of the 403(b) marketplace."
Goldbrum said the institute is in the process of creating a task force and is planning a one-day workshop or forum in the near future to further address these issues.
403(b) plans are evolving at a rapid pace, considering how disorganized they were in the past. Prior to the changes mandated more than a year ago by regulators, 403(b) retirement plans for educational and governmental workers were a complete mess.
Under the old system, vendors ran the 403(b) plans, while confused employees struggled to understand their investments and employers sat on the sidelines - doing nothing. No one was really keeping track of where the money was going or how much was being spent on fees. Plan sponsors had little to no involvement, and participation rates were low.
The key changes to 403(b) plans are a written plan document requirement, formal information-sharing agreements between vendors, and the elimination of 90-24 transfers to unapproved providers.
While the general consensus is that the changes are a significant improvement, the new rules from the Internal Revenue Service and the Department of Labor inevitably left a lot of gaps. The lack of guidance from either agency created confusion and uncertainty in 403(b) plan adoption, and companies began filling the holes in a piecemeal fashion.
Without a standardized format for communication, aggregation and common remitter services, each developed their own formats for sending vendors payroll information. Many plans still use multiple vendors, and it can be very frustrating trying to sort out all the different formats.
Getting everyone to speak the same language isn't easy, but coordination will be essential going forward, said James Racine, assistant vice president at Lincoln Financial Group.
The new SPARK Institute guidelines make it easier for plan sponsors, vendors and aggregators to comply with the new Form 5500 reporting requirements by creating a more efficient and cost-effective process for completing the form, instead of having everyone working with their own format.
"The old system had employers sending vendors the names and Social Security numbers of plan participants, but there was a need for a lot more data," Racine said.
In the new forms, the minimum required data includes a participant's full name, Social Security number, date of birth, employer, hire date, termination date, participant status (active, retired, deceased or terminated), account balance and vested account balance. The data should be provided in an electronic format such as an Excel or text file or in a format that Excel can import directly.
By building consensus among aggregators and vendors, it will allow more consistent service levels to all employers, Goldbrum said.
"This gives an employer the industry standard for all vendors," Racine said, so they don't have to comply with the unique requirements of each vendor.
A large number of the SPARK Institute's participating companies were active in helping form these best practices, he said, but there are still many complexities that need to be worked out.
For now, vendors are still in charge of 403(b) plans and are naturally reluctant to give up their control, but it is becoming increasingly clear that employers no longer need multiple vendors under the new rules.
401(k) plans bypass this multiple vendor problem by typically having a single plan administrator that operates an open-architecture format, allowing employers to mix and match offerings from different providers.
The problem with getting multiple vendors to speak the same language is a moot point if the plan sponsor uses a single vendor, Racine said. In fact, most vendors say they are perfectly capable of providing all the data and services for a plan, he said.
Having a single vendor may also solve compliance issues.
By complying with the Employee Retirement Income Security Act of 1974 (ERISA), 403(b) and 401(k) plans are protected from lawsuits by individual states, although legal experts say the line distinguishing ERISA and non-ERISA plans is thin and treacherous.
Employers who have multiple plans, such as an ERISA plan and a non-ERISA plan, should consider merging them into one ERISA plan for legal reasons, Racine said.
"Take a look at why you have two plans and whether they really are two plans," he said.
The IRS recognizes these are big changes and has given the industry more time to solve these issues, postponing the effective date until the end of the year.
Even though 403(b) vendors compete with each other, "it's critical that we work together to help plan sponsors meet their needs," Racine said.
"In the end, it's really all about the employer. We want to make their lives easier. Whenever there is a lot of confusion, the employer pays the price," Racine added.
Regulators are determined to make 403(b) plans more similar to 401(k) plans in order to simplify the plans, increase efficiency and get more people saving for retirement. With this new design, industry leaders hope they can boost participation in 403(b) plans from the current rate of 40% to 60% to the much higher 401(k) levels of 70% and 90%.
A recent study by ING U.S. Retirement Services found that 62% of investors employed in the higher education community are less confident about living comfortably in retirement since the market decline in 2008, yet 63% said they did not expect to delay retirement and 40% said they made no changes to their retirement plan's investment mix.