403(b)s Relieved From SEC Rule in Certain Situations

According to an SEC no-action letter, ING Life Insurance and Annuity Company asked to dispense with acquiring acknowledgements of withdrawal restrictions from participants, as required by the Investment Company Act, in situations where employers have automatic enrollment features in their [Employee Retirement Income Security Act] ERISA-covered Section 403(b) programs that, in certain circumstances, cause new employees to be added as participants under a group variable annuity contract issued by ING Life without an application form from such employees. The employers generally request that ING Life add the new employees as participants under the contract without obtaining acknowledgements from such employees.    

In addition, ING Life asked to dispense with acquiring acknowledgements when employers that own group variable annuity contracts (or sponsor custody account arrangements for holding mutual fund shares) as investment vehicles for Section 403(b) retirement programs covered by ERISA, acting in a fiduciary capacity with respect to their programs, determine to replace the group variable annuity contract (or custody account arrangement) with a group variable annuity contract issued by ING Life.  

The office of insurance products in the SEC’s division of investment management agreed with ING Life that it could dispense with acknowledgements for employers meeting the following criteria: 

• They are fiduciaries of their program and their program is a Section 403(b) program subject to ERISA; and 
• They have acknowledged that the selection of an investment option as a default investment by them and their determination that such option is a “qualified default investment option,” as defined in Labor Department regulations under the Pension Protection Act (PPA), has been made in their capacity as a fiduciary to their program.  

The no-action letter noted that the conclusion is based on the facts and representations provided by ING Life, and different facts or representations may require a different conclusion. For this reason, the letter seems to only apply to ERISA-governed 403(b)s.

(Cont...)

Information on Thomson’s explains that 403(b) contracts that offer variable investment funds are subject to the jurisdiction of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940. Because of this, 403(b) investment contracts must be “registered” with the SEC and are treated very similarly to mutual funds offered for sale to individuals outside of retirement plans.  

One requirement of being an investment company is that an individual’s financial interest in those companies must be able to be freely distributed at any time. However, this causes a potential problem with 403(b) plans. The Internal Revenue Code requires that certain distribution restrictions be placed on all contributions to a 403(b) custodial account and on elective deferrals made to annuity contracts.    

In 1988, the SEC issued a no-action letter stating that it would take “no action” against 403(b) plans that impose these distribution restrictions, as long as: 

• the prospectus includes a disclosure about the distribution restrictions; 
• the sales literature includes information about the distribution restrictions; 
• anyone selling the product specifically to the participant brings the distribution restrictions to his or her attention; and 
• each participant signs an acknowledgement of the distribution restrictions before making a contribution.