PALM BEACH, Fla. - Almost a year after new rules governing 403(b) retirement plans for educational and non-profit workers were supposed to take effect, plan sponsors, vendors and third-party administrators are still struggling to comprehend the myriad of changes.

In lieu of the promised guidance from the Department of Labor and the Internal Revenue Service, industry leaders are trying to develop best practices to fill in the regulatory gaps and standardize competing formats, as well as interpret the confusing wording of Form 5500 Schedule C, which governs eligibility, compensation and fiduciary rules.

"The IRS keeps saying that guidance is coming very, very soon," said David Levine, a principal at Groom Law Group, speaking at the Society of Professional Asset Managers and Record Keepers 2009 Forum held at The Breakers.

The changes aim to make 403(b) plans closely resemble their 401(k) counterparts and hopefully boost participation from the current rate of 40% to 60% to 401(k) participation levels of 70% to 90%.

"Vendors and third-party administrators are starved for consistency," said Bob Melia, vice president of product strategy for retirement solutions at Lincoln Financial Group.

Before the changes took effect at the start of the year, 403(b) plans did not have these requirements, which made it very difficult for plan participants to see what they were invested in, how their money was being distributed or how much they were paying in fees.

Last year, the DOL and IRS made the first substantial changes to 403(b) regulations in more than 40 years, letting the sunshine in on a previously dark and expensive area. The most significant changes are the requirement of a written plan document, formal information-sharing agreements between vendors, and the elimination of 90-24 transfers to unapproved providers.

Despite the good intentions of regulators to revolutionize retirement plan options, the lack of guidance from either agency has created a lot of confusion and uncertainty in 403(b) plan adoption. Without a standardized format for communication, aggregation and common remitter services have 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.

"It's the Wild West out there," said Angela Hoteling, chief compliance officer at The Omni Group. "We need to circle our wagons and come together to figure out a way to make this easier for plan sponsors and participants. Unless this gets easier, they are simply not going to want to be in the 403(b) area."

"The industry is coming together in some respects with consistent data file feeds among most vendors where information sharing is necessary," Melia said. "The next frontier of consistency could be an assimilation of forms or data requirements on forms, transaction approval processes, 5500 data feeds and 5500 best practices."

The SPARK Institute has been developing and updating a set of best practices to serve as a standard industry guide, but keeping all the changes current has been a dynamic, constantly evolving process.

"We should be pushing vendors to accept this one format," said James Racine, assistant vice president at Lincoln Financial Group, and an active participant in the development of the best practices. "These benefits won't be realized unless people adopt them. Employers who have multiple vendors should be asking their vendors and partners to comply with these best practices."

SPARK leaders are trying to make the best practices as unobtrusive as possible, and have stated they will release updated changes once a year or so to limit the amount of significant restructuring required.

"We are hoping aggregators, common remitters and third-party administrators will accept these best practices," Racine said. "To implement a change like this is going to take all of us working together. We hope to see broad acceptance."

Safe Harbor

Complying with the Employee Retirement Income Security Act of 1974 (ERISA) can be burdensome and constrictive for plans not used to such requirements, but adhering to the standards can offer plan providers protection from litigation, particularly in state courts.

"The local courtroom is the last place you want to be," Levine said.

"You are off the hook for ERISA liability if you're not an ERISA plan, but you're probably subject to state rules," said Evan Giller, a partner at Giller & Calhoun. "Firms want to be able to get rid of a provider who's not doing the job, but an employer doesn't have the power to map the money of one discontinued investment provider over to another investment provider."

The thin line between an ERISA plan and a non-ERISA plan is easily crossed, and firms will want legal counsel from an ERISA expert to make sure they stay in their intended areas, Levine said.

In general, tax-exempt employer plans are subject to ERISA unless the DOL safe-harbor provision applies, he said. Governmental plans are not subject to ERISA, and church plans can "elect-in" to ERISA.

In their efforts to bolster 403(b) plans, regulators have made ERISA even more thorough, especially compliance with Form 5500 Schedule C.

"In the past, the ERISA requirements for Form 5500 were very minimal, just the name, rank and file number," said Marilyn Collister, senior director of legislative and regulatory affairs for Great-West Retirement Services. "Form 5500 essentially makes 403(b) plans the same as 401(k) plans."

"All 401(k)s are ERISA plans," Collister continued. "If you want to look like a 401(k), your 403(b) must comply with ERISA. Some plans are just becoming ERISA for the first time, rather than try to walk the fine line of safe harbor."

Safe-harbor rules will need to be improved in order to make them more meaningful and useful, and the industry should work with regulators to come up with these changes, said Stephen Saxon, a principal at the Groom Law Group.

The new requirements offer dramatically increased fee disclosure, but all this disclosure can be confusing and overwhelming to parties unfamiliar with such transparency, he said.

Firms risk allegations of being imprudent if they don't examine and adjust their fees every few years, Saxon said. Due to the passive nature of 403(b) investors, the plans should probably be priced like 401(k) institutional products, rather than the more expensive retail products, he said.


(c) 2009 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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