Ready or not, the deadline to update 403(b) plans is here.
As of Jan. 1, 2009, the new changes mandated by the Department of Labor and the Internal Revenue Service will significantly alter the 403(b) funding model by shifting responsibility from vendors to plan sponsors.
The changes are part of an ongoing effort to make the non-profit, governmental 403(b) plans commonly used by school districts resemble the for-profit 401(k) plans used by nearly everyone else.
The new rules will make 403(b) plans similar, but not identical to 401(k)s. Sorting out those differences can be very frustrating for plan sponsors, particularly for school districts that did not previously have this responsibility.
"The Jan. 1 compliance deadline is still hard and firm," said Larry Goldbrum, general counsel of the non-profit SPARK Institute, during a webinar last week. He said the institute created a special task force about a year ago to identify what data needed to be shared and to try to develop a best practices guide for the 403(b) industry. The task force made repeated pleas for an extension and recently sent a final letter to the Treasury Department asking it to postpone the rule.
"Although the Treasury is currently considering it, they have not given a response yet," he said. "Unfortunately, the pleas to Treasury and the IRS have not been answered. What they're trying to do is force the industry to get closer to compliance. They feel the industry and employers have had plenty of time."
The IRS announced the changes in July 2007, giving plan sponsors 18 months to implement the changes, but offering little guidance. The IRS has said it does not plan to extend the Jan. 1 deadline, but may grant individual extensions.
"We have no intention of going out and doing an extensive number of audits next January, nor do we have plans to increase the number of 403(b) audits we're doing now," said an IRS official, who asked not to be identified, in an interview with MME in September.
The current IRS codes governing 403(b) plans were written in 1964. While Congress has made some major changes in the law since then, the IRS hasn't really done anything to update the regulations in 44 years.
The key changes to the 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.
"Information sharing is at the heart of the new changes," said Thomas Peller, vice president of compliance for Fidelity Investments. "This concept allows information to move around as necessary in a multi-vendor environment, while ensuring that limits aren't exceeded."
Unlike 401(k) plans, 403(b) plans currently do not have these requirements, making it very difficult for plan participants to see what they're invested in, how their money is being distributed and how much they are paying in fees.
"Almost all the changes in 403(b) regs are interconnected," Peller said. "Everything you change will impact something else."
The SPARK Institute has been developing a set of best practices to serve as a standard industry guide, but keeping all the changes updated has been a dynamic, constantly evolving process, Goldbrum said.
"The task force thought it would be helpful to document census and contribution data," said Sue Persio, senior IT project manager at ING, but the main focus was on information sharing.
"Having a standard format reduces the efforts at the beginning and it reduces the likelihood that the data will be misused," she said.
As changes kept coming in, the task force members had to continually adjust their process while making sure they kept to their goal, said Ralph Sanna, director of strategic initiatives at TIAA-CREF. Luckily, the program was originally designed to be flexible, he said.
"The key is the ability to share data in the same format," Sanna said.
When the IRS first began looking into 403(b) plans, regulators were shocked to find that in many instances, the plans had as many vendors as participants.
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.
Participants were allowed to pick their own providers, even if they hadn't been approved. Some people were taking hardship withdrawals from multiple vendors. Many 403(b) participants weren't even technically eligible to be in the plan. 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.
The new 403(b) requirements should eliminate these problems, but implementing them required a complete overhaul of the traditional 403(b) mindset.
"It's very important for employers to know they have a larger administrative role," said Marilyn Collister, national director of regulatory policy for Great-West Retirement Services. "If an employer moves from one recordkeeper to another, the money doesn't automatically move."
Current 403(b) participation rates are a dismal 40% to 60% involvement, compared to the much higher 401(k) participation rates of 70% to 90%, said Jim Racine, assistant vice president and director of customer support strategy and projects for Lincoln Financial Group. These new changes will make the two types of plans much more similar, leading to an expected increase in 403(b) participation rates.
"We're going to see lower-cost products on the market," Racine said. "There may be less profit and some commissions may get cut, but if participation rates go up, and there are fewer vendors, your piece of the pie goes up."
Under the new requirements, plan sponsors must maintain a written plan document that details eligibility terms and conditions, benefits, limitations, distributions and other provisions. The use of 90-24 asset transfers to unapproved providers will be phased out, though existing transfers will be grandfathered in, Peller said.
If a plan sponsor wants to have multiple vendors, those vendors need to have a formal contract to share information, including details about compliance, loan activity, hardship withdrawals and severance packages.
With 18 months' notice, plan sponsors have had plenty of time to get ready for these changes, but inevitably there will be some last-minute cramming to get everything finished as the clock counts down the days, hours and minutes to the New Year.
"There are still a lot of issues and a lot of companies are struggling," Goldbrum said. "Right now, everybody is focused on getting ready."
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