Compliance December 19, 2008

Experts Stress Benefits of 403(b) Information-Sharing Best Practices

Due to new 403(b) regulations, plan sponsors and their advisers have faced the task of deciding on procedures for information-sharing to and from plan vendors.
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In the 401(k) world, because typically plans have a third-party administrator or recordkeeper responsible for making sure funds are invested properly and recorded, the TPA or recordkeeper might have required formats for sponsors to send participant contribution, loan repayment, and census data. However, in the 403(b) world, this “aggregator” role is new, so sponsors may consider enlisting the help of a provider of common remitter services.

In a Webinar sponsored by The SPARK Institute, Jim Racine, assistant vice president, Lincoln Financial Group said, “A standard format [for information sharing] is a need specific to the 403(b) market due to the multiple-vendor environment.” Ralph Sanna, director of Strategic Initiatives, TIAA-CREF, added that it is hard for vendors to have hundreds of different formats coming in from sponsors and to customize their systems for these different formats.

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Paul Jackson, vice president of Institutional Services, AIG Retirement, said a best practices format for information sharing not only simplifies things for common remitters, but also for employers who will continue sending data to each vendor and want to use a standard file format.

Jackson added that TPAs and vendors should encourage the use of information-sharing best practices by sponsors because it will not help with common remitter, but can help facilitate information sharing among plan providers.

SPARK Best Practices

The SPARK Institute has developed a best practices guide for information sharing that includes data formats for transmitting transaction data (see “SPARK Updates 403(b) Info Sharing Best Practices for Roth Values’). Sanna noted that the SPARK data format not only can be used for common remitter data such as contribution amounts and loan repayments, but can facilitate 10-b-10 reporting (for contribution timing), plan limits monitoring, and providing census data for other plan administrative duties.

Racine added that the SPARK format facilitates auto enrollment, and sharing of data for FINRA monitoring requirements such as anti-money laundering rules, and providing contact information for participants.

Larry Goldbrum, SPARK general counsel, said in the Webinar that the SPARK has two parts for the common remitter function: one for sending data to vendors only for participants who selected them, and one for sending all data, including census data, to a plan “aggregator.” He suggests that adopting the best practice format even benefits sponsors in an exclusive-vendor environment because it consolidates all plan data.

Jackson noted that the SPARK task force that developed the best practices is encouraging questions to SPARK regarding the format. The questions will help in refining the best practices, but he assured Webinar attendees that the task force will try to make adjustments with minimum format changes.

Written Plan Document Relief

In Webinar, Jackson of AIG Retirement pointed out to attendees that the relief provided by the Internal Revenue Service in Notice 2009-3 (see “IRS Offers Relief for 403(b) Written Plan Requirement’) from the 403(b) written plan document requirement as of January 1 only delays the time for getting the document in place; it does not delay the effective date of new regulations pertaining to operational procedures.

“This is key because plans will be required to correct any pre-adoption deviations to the plan from document that is finally adopted,” Jackson said. He warned sponsors that providers that receive contributions after January 1 are in the plan, so sponsors should operate the plan in accordance with intent to minimize any operational errors. Therefore, it is prudent to work toward information sharing compliance by January 1.

The “Best Practices for 403(b) Plans Information Sharing — Minimum and Comprehensive Data Elements Version 1.03,” as well as questions and answers on the best practices is availalbe here.

Data & Research December 19, 2008

DC Plans Keep Equity Ownership Alive

Equity ownership in defined contribution retirement plans has risen in recent years.
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An Investment Company Institute (ICI) and Securities Industry and Financial Markets Associate (SIFMA) report reveals that while overall household equity ownership has fallen off since 2001, defined contribution retirement plan sponsorship by employers have kept ownership rates up.

According to ICI and SIFMA data, between 1989 and 2001, the overall household equity ownership rate jumped from 32% to 53% before falling back to 45% of households in 2008. However, over the same time period, the percentage of U.S. households owning equities inside retirement accounts at work rose from 12% to 31%, and 2008 data match the 2001 peak.

A second way to consider how DC plans have affected equity ownership, ICI contends, is to consider differential ownership growth across age groups. Individuals born after 1940 were much more likely than those in older age cohorts to have had DC plan coverage while working because DC coverage expanded greatly during the 1980s, and data shows rapidly rising equity ownership rates for working individuals in this age group between 1989 and 2008, according to the report. Meanwhile equity ownership was largely stable for the individuals born before 1940 who were much less likely to encounter a DC plan.

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The report indicates that even though overall household ownership rates for both equities and bonds grew dramatically between 1989 and 2001, then tapered off, the ownership rate in 2008 (47% or 54.5 million in first quarter) is still much higher than in 1989. ICI and SIFMA data show that ownership of equities and bonds at any given level of household income is much higher for those offered a DC plan at work, which reinforces the influence of employer sponsorship of these plans.

Risk Factors

Willingness to take risks has dropped among both younger and older households since 2001, which the report says appears to be related to the reappearance of stock-market turbulence in the bear market of 2000 to 2002 and appears to have had a negative impact on ownership rates during the past few years. However, the aging of Baby Boomers could be another factor, as the household survey found that older investors are much less likely to say they are willing to take above-average or substantial risks in order to get higher returns.

Bond, Equity Owner Demographics

“Portfolio allocation and investment strategies over the life cycle are consistent with theoretical predictions and respondent self-reported savings goals and risk tolerance,” the report says. “Investor statements about their goals and willingness to take risk in order to get higher returns are supported by observations on how the equity and bond shares of portfolios vary across age groups.’ As an example, the report says higher risk avoidance among the older investor group is indicated by higher shares of their portfolios invested in bonds.

The report suggests that household income is the dominant characteristic associated with equity and bond ownership rates among the working-age population. For example, while 86% of 50- to 64-year-old households with earnings of $100,000 or more are equity or bond owners only 10% of 50- to 64-year-old households earning less than $25,000 are equity or bond owners.

ICI and SIFMA said the explanation could be that lower-earning households generally exhibit less tendency to save for retirement because they may be more focused on near-term spending needs rather than retirement, or because they get a higher benefit replacement rate through Social Security, reducing the incentive for additional retirement savings.

Within other demographics, the report data show ownership rates are generally higher for those with higher education (67% for those who had completed college verse 30% for those with a high school education or less) and for non-Hispanic whites (55% verse 33% of other races). In addition, individuals married or living with a partner are much more likely to be equity and bond owners than single individuals (56% verse 33%).

Investment goals and willingness to take risks among equity and bond owners also varies with age, because naturally as investors age, their focus shifts from building a retirement nest egg to managing the variability of investment returns and generating an income stream, according to the report. In 2004, the fraction of individuals reporting a willingness to take risk for higher returns was 24% in the under 35 group and 8% in the 65 or older group.

The report, “Equity and Bond Ownership in America 2008,” is available here.

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