403(b) Space Ripe for Advisers

“You’re really starting to see these 403(b) plans look a lot like 401(k),” Tim Maher, senior vice president and national sales manager at Natixis Global Asset Management, said during a Matrix Financial Solutions webinar, “The Basics of 403(b) Plans.” This provides a great opportunity for advisers to educate plan sponsors about the nuts and bolts of their plans, he added.

Compliance in 403(b) plans, for example, is starting to take the shape of 401(k)s. The IRS now requires 403(b) plans to have written plan documents that include eligibility; benefits provided under the plan; contributions and limitations; descriptions of investment products available; distribution options, limitations and requirements; and loans, hardship withdrawals, catch-up contributions and Roth (optional).

The IRS has estimated that only 56% of 403(b) plans have complied with this requirement, Sarah Simoneaux, president of Simoneaux & Stroud Consulting Services, said during the webinar. “The good news is, the IRS has really been focused on this, and they are looking to help in the 403(b) world,” she said.

Sponsors will need help from knowledgeable financial professionals in creating their written plan documents, she added. Simoneaux said she would highly recommend that advisers partner with third-party administrators (TPAs) who understand 403(b) regulations.

It is also important to keep in mind that not all of these plans are subject to the Employee Retirement Income Security Act (ERISA): Typical ERISA 403(b) plans can include institutions such as hospitals or higher education, while typical non-ERISA plans include K-12 schools and steeple churches.

Private higher education may not realize they are ERISA plans, so advisers have an opportunity to speak with them about this, Simoneaux said.

Advisers can also speak with colleges or universities about independent contractors, as some employees may be incorrectly excluded as independent contractors in 403(b) plans. Simoneaux said the IRS is particularly concerned about this. “The definition for independent contractor is very controversial,” she said.

In addition to eligibility mistakes, advisers can discuss other common violations the IRS has noted such as not following the terms of the plan document; excess contributions (including the pre-retirement catch-up rule); not following loan rules; and hardship distribution failures.

In general, 403(b) plans are moving toward a 401(k)-like world with fee transparency and open architecture (see “New Season for 403(b)s”), which also provides a great opportunity for advisers to discuss features with plan sponsors in this space, Simoneaux said.

Advisers who want to get into the 403(b) space will best succeed by understanding multiple plan types, she added.