The Same, but Different

In 2007, the Internal Revenue Service (IRS) finalized sweeping 403(b) regulations set to remake the defined contribution plans offered by tax-exempt entities such as K-12 school systems, higher education institutions, and nonprofits. These new rules offer opportunities for advisers willing to help plan sponsors navigate these new regulatory waters.

A primary concern for many 403(b) plan sponsors with an existing plan is how to transition from a program that likely required little plan sponsor involvement and multiple vendors to a model where the plan sponsor is a much more central figure—and may well have an interest in shrinking the current provider menu. According to a recent survey sponsored by the Principal Financial Group, and conducted by the Profit Sharing/401k Council of America (PSCA), most plan sponsors could use some assistance: 41% of 385 respondents say they need to make changes to their 403(b) plan to comply with the new regulations, and just about one in 10 said they were unsure of their plan’s ERISA status.

Those new regulations require that 403(b) plans have a formal, written plan document in place. While the deadline for this was delayed last fall from January 1, 2009, until January 1, 2010, plan sponsors cannot rest on their laurels. In fact, despite the delay in implementation of the physical document, plan sponsors were required to operate their plans in accordance with the rules as if a document were in place on January 1, 2009—ensuring cooperation among vendors, monitoring contribution and withdrawal limits, and issuing loan and hardship approvals.

The good news for advisers is that plan sponsors (at least the K-12 subset of this market) are willing to pay for help, according to a survey conducted by LIMRA in collaboration with the Association of School Business Officials International (ASBO) among ASBO members in July 2008. In fact, among school districts that did not currently pay for a third-party administrator (TPA) or consultant as of the survey date, 59% said they would be willing to pay for one over the following 18 months. The vast majority (89%) said they would pay a TPA or consultant for compliance monitoring and 80% said they would pay for recordkeeping consolidation.

Moving Forward

In a recent Webcast sponsored by the National Association of Government Defined Contribution Administrators (NAGDCA), Pam Everhart, Senior Vice President, External Policy Development and Client Advocacy at Fidelity Investments, noted that the new 403(b) regulations and guidance spelled out the rules clearly, but did not offer much on how to comply with those rules. This leaves the door open for specialized advisers to come in and offer assistance. Since failure to comply with the IRS regulations could result in plan disqualification and taxation of participant savings, advisers can help reduce the burden on the plan sponsor by creating by additional plan oversight.

One area advisers are offering help is in the request for proposal process in selecting, or in reducing, vendors. According to the LIMRA and ASBO survey, most school districts (55%) indicated they did not send out a request for proposal (RFP) in the vendor selection process, while a third indicated they did use an RFP with the help of a TPA or consultant.

When selecting vendors, the survey indicates that cost is not the prevailing factor; instead, plan sponsors put emphasis on employee service (56% of school districts) and choice of investment funds (50%) over cost (35%).

When sponsors are ready to establish their written plan document, Everhart suggested they start with a plan that reflects the new regulations, and identify optional features they want to offer. Many vendors and TPAs offer standardized documents that can help (see “The Written Rule,: below).

In order to monitor the plan, Everhart suggested that employers create a 403(b) advisory board of key internal employees to make plan decisions and continually monitor vendors and/or the TPA.

Day-to-Day Concerns

During the Webcast, Everhart also said that a comprehensive 403(b) service offering from a vendor or TPA should include: compliance support; plan design consulting; plan document services; participant education services; plan-level reporting; common remitter services; contribution monitoring; distribution outsourcing; QDRO qualifications; universal availability notification services; 415 limit monitoring; and signature-ready Form 5500 services.

Julia Durand, Pension2 Administrator, California State Teachers Retirement System (CalSTRS), added that due diligence in selecting a vendor or TPA includes visiting the TPA, checking references, and identifying the processes in place at the vendor or TPA.

Even with assistance, plan sponsors will have administrative concerns, Everhart pointed out. For one, she noted that the new rules end the era of employee self-certification for loans or hardship withdrawals; sponsors now have to approve such transactions and check limits across all vendor accounts. It may be simpler for sponsors to restrict loans and withdrawals to accounts under one vendor or limit number of loans or withdrawals allowed at a time. These restrictions could save on administrative costs also, Everhart says.

However, sponsors also could choose to delegate the responsibility for approving loans and withdrawals and monitoring plan limits to a vendor or TPA, according to Everhart. As contribution limits also must be monitored, and IRS 415 limits on contributions must be adhered to, a vendor or TPA also could provide common remitter services, or centralized recordkeeping, she says. Outside vendors also can help the sponsor meet the universal availability rules requiring new hire and annual employee notifications.

However the plans are put together and regardless of what is kept in-house or outsourced, what is most important is that sponsors are successful in managing and operating plans under the increased burdens of the new rules.

(b) Prepared for Participant Questions

As 403(b) plan sponsors and advisers prepared for new Internal Revenue Service (IRS) regulations in effect as of January 1, 2009, no doubt there were communications with participants about the new environment, but do they know everything? Below is a list of questions advisers and sponsors should be prepared to answer, courtesy of consultant and plan administrator Security Benefit:

• What has the school administration done to prepare for the compliance deadline?
• How have the administration and teachers’ associations worked together on this issue?
• Was our plan compliant by the IRS deadline? If not, what impact does that have on me and my retirement assets?
• What changes should I expect and when will I get more information?
• Do I have to transfer my current assets to a new provider?
• What are the fees and expenses of the new providers?
• Who will help me in making these changes and what kind of service can I expect?
• How should I decide which provider to select?

The Written Rule
An adviser has many places to turn when helping to get plan documents in order

Every retirement plan is required to have a formal, written plan document that details how it operates and its requirements for things such as eligibility, vesting, and other plan provisions. That document is not like an ancient historic manuscript that winds up being written, stored in a desk drawer, and then basically forgotten. With Washington enacting legislation or issuing new regulations that affect the retirement industry virtually every year now, plan fiduciaries are required to keep pace by amending their plan documents to incorporate those federal changes. In fact, the passage of the Pension Protection Act in 2006 mandates that all plan documents be rewritten for 2009, although those changes can be made in 2010.

Plan advisers generally have only a tangential role when it comes to the design and provisions of a plan document. The actual writing or filling out of the document generally is carried out by a plan recordkeeper or third-party administrator (TPA). The plan adviser’s participation in the process primarily involves helping the sponsor select who will do the grunt work. Yet that role is not to be taken lightly. A plan document provides the legal underpinning of the plan itself and prescribes what activities fiduciaries can or must undertake to benefit participants.

“Paperwork matters when you’re dealing with a qualified plan,’ says Robert M. Kaplan, Vice President, Corporate Markets, for ING U.S. Retirement Services. “Many of the problems the IRS [Internal Revenue Service] finds under audit actually have to do with plans not having their documents up to date or properly amended.’ If fiduciaries ever are brought to court by participants or other entities, it is imperative that a plan document has spelled out exactly what the sponsor (and perhaps the adviser) should be doing on behalf of behalf of participants.

That is why the adviser’s role in selecting who will design the document is an important one. “There are varying degrees of risk with different plan designs,’ explains Anton Bayer, Senior Vice President with CBIZ Retirement Plan Solutions, in San Jose, California. “The plan adviser should do due diligence to be sure the ideas the TPA comes up with actually work.’

That generally should not be too difficult a task. The great majority of plan documents, particularly for small sponsors, follow a preformatted prototype authorized by the IRS. They usually allow plan fiduciaries and the TPA or recordkeeper to check off yes or no answers to a series of questions about the plan’s design and responsibilities. Larger plans with a more diverse participant base and more complex investment issues often do need to file a much more detailed document that likely will demand the participation of ERISA lawyers to design and write. In those cases, the role of the adviser can be even more significant in selecting the right TPA.

Sometimes a TPA does not need to be hired, because the cost of a plan document can be bundled into a recordkeeper’s general services contract. However, if one must be hired, the cost to write a plan document is another factor that an adviser should weigh in on. Comparison shopping is advised by many experts. Small plans should not have to pay more than $1,000 for a document to be designed or amended, and typically the cost is much less. For larger plans, the cost can go into the thousands of dollars.

“You don’t need a lot of sophistication with a small plan,” so advisers should be certain their sponsors are not overpaying a TPA for preparing a document, says Timothy M. McCutcheon, President of ftwilliam.com, LLC, a Wisconsin firm that provides software for writing plan documents.

Advisers can peruse a plan document to assure that it provides sponsors with enough flexibility to make changes in plans without the need to amend the document continuously. That flexibility can cover such issues as the elimination of safe harbor matches and the age at which a worker is eligible to participate in a plan. “If the language is liberal, to a point, you can make changes [in plan features] without having to amend the document,” explains Christine Soscia, Vice President and plan consultant with 401(k) Administrators, in Las Vegas, Nevada. Certain changes, however, cannot be made without amending the document if they would take away benefits or services from participants.

Online Options

Technology provided by a firm like ftwilliam.com has helped to modernize the preparation of plan documents and make them much easier to complete. McCutcheon says his company’s software even helps automate the process by sending out notices to participants and reminding sponsors of the need for document updates.

With firms such as ftwilliam.com, McKay Hochman, and Datair, among others, plan advisers and their clients have many places to turn for all types of plan documents, summary plan descriptions, and other administrative forms. Whether plans are using prototype plan documents or individually designed documents, the technology today allows for much of the work on plan documents to be completed over the Internet, another recent step forward in the writing of documents made possible by more sophisticated technology. Since the writing and formatting of documents can be pretty routine, especially for small plans, advisers can assist sponsors by hiring TPAs that offer a useful array of automated services.

“The technology—the immediacy—has really affected and sped up the process,” says Kaplan. “There are now document systems that I can complete over the Internet and send to a printer right in the plan sponsor’s office. The adviser needs to be aware of this.” —Louis Berney

Illustration by Gérard DuBois