PPA compliance and investment reviews offer 403(b) plan new options

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By Shannon Silva | 14 December 2009

A large regional healthcare client requested a full compliance and investment review of its 403(b) plan to ensure it was prepared for the implementation of the final 403(b) regulations. The regulations imposed a number of new requirements on sponsors of 403(b) plans. The most significant requirement was that all 403(b) plans be in writing, which was a huge change for sponsors who had limited involvement in the operations of the plan. The plan sponsor would also need to take a more active role in ensuring that the plan is operated in compliance with the written document, as well as monitoring the contributions to and distributions from the plan. The client engaged Milliman to review the draft plan document, plan operations, and communications. The client also asked Milliman to review the investment options in the plan. The client felt it was important that the funds offered in the plan were diverse enough for its demographics and that the fees paid by participants were fair.

Milliman spotlights areas for improvement

Milliman performed a thorough plan review and presented the findings in a written report as well as an in-person presentation. A large number of changes to the draft plan document were suggested to reflect the actual operations of the plan.

The compliance and operations review involved interviewing payroll and human resources staff, as well as the fund sponsor on-site representative and account representative. In addition, the draft plan document was reviewed for consistency with current plan operations and compliance with the new regulations. Employee correspondences were also evaluated. Milliman also recommended implementation of a number of internal administrative procedures, training for specific staff members, and new communications processes between the employer and the fund sponsor. Milliman found that many employees who were not eligible for other benefits wrongly believed that they were ineligible for the 403(b) plan. We recommended an annual communication to all employees explaining plan eligibility to satisfy the universal availability requirement of the final 403(b) regulations.

The investment performance and expense review involved gathering data on all investments in the plan and assessing performance on each currently available fund for one, three, five, and 10 years. Performance for each fund was compared to applicable indices for each period. Overall fees for the plan were compared with fees in similarly sized retirement plans. Finally, Milliman researched fund share classes to see if appropriate share classes were in place. We identified the investments in the plan that had less expensive share classes available. In addition to the expense ratios built into the mutual funds, each employee’s account was charged an annual “wrap” fee of 20 basis points, assessed on a quarterly basis. Milliman noted that the overall plan expenses were at least 20 basis points above the average fees paid by similarly sized retirement plans.

Milliman concluded that the investment line-up offers a wide variety of funds, allowing each participant to create a well diversified portfolio.

Running smoothly and more efficiently

The plan document changes were implemented by the fund sponsor. The employer was able to sign a document before the end of 2008, which reflects the actual plan operations and only allows for those features the employer wishes to offer. New procedures were put into place and payroll staff members receive regular training on basic 403(b) plan administration. The staff has been supplied copies of the plan document for reference in its day-to-day activities. The employer and fund sponsor are exchanging more data on a regular basis so that each has the information needed to make appropriate decisions. The client has sent a notice to all employees informing them of the plan and their eligibility to participate, and will continue to do so annually.

The client requested that Milliman attend its annual meeting with the fund sponsor. During the meeting, the client and the fund sponsor agreed to review the wrap fee with the intent to eliminate the fee completely. Upon review, the fund sponsor removed the 0.20% fee, which is projected to save the plan approximately $200,000 a year.

The plan is currently running smoothly and Milliman continues to assist the client with complex consulting issues as they arise.