403(b): New rules, new risks, new consequences

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By Kara W. Tedesco | 04 December 2007

THIS SPOTLIGHT

Dec. 4, 2007

The new 403(b) regulations will change the way these plans are administered and present new risks for the employers that offer them.

We asked Employee Benefits Consultant Kara Tedesco to outline the risks involved.

Q: What are the new responsibilities placed on employers with 403(b) plans?

A: All employers, whether they sponsor an ERISA plan or a nonERISA plan, are going to need to make sure they have a plan document in place. The plan document provides guidelines on how the plan should operate day to day.

Sponsors need to know who their current vendors are, as well as the investments and associated fees of the vendors. In some instances, they're going to need to have information-sharing agreements in place with the vendors by Jan. 1, 2009.

These are two big changes for employers and plan sponsors, however there are other considerations. Plan sponsors should have an investment policy statement that explains the investment selection and monitoring processes. They also need to make sure that contribution limits aren't violated, especially if they have multiple vendors. Not to forget, plan sponsors need to make sure that the plan complies with nondiscrimination requirements.

Sponsors may want to think about hiring a third-party administrator or consultant to help navigate through the requirements. An outside perspective could prove quite valuable as sponsors go through these changes.

Q: What are the consequences of not attending to these details?

A: Participants could be subject to adverse tax consequences if there are operational failures. Possible failures might include not having a written plan document in place that meets the regulation requirements, or not satisfying the nondiscrimination requirements.

Q: Does an employer need to know about all the vendors offering products to its employees and can it have more than one vendor?

A: Yes and yes, plan sponsors can have more than one vendor for the plan. Either way, sponsors are required to know and manage their approved vendors and those relationships should be reflected in the plan document as well the information-sharing agreements. These agreements allow sponsors and vendors to share participant information such as employment status, status in any other qualified plans, and history of loans and distributions taken. Without knowledge of these details, there is not an approved relationship with a vendor. Sponsors need to know as much as they can about the people with whom they are working.

Q: What kind of new responsibilities do employers or plan sponsors have toward the employees or participants in their 403(b) plans?

A: There are three concepts for sponsors to keep in mind: education, encouragement, and promotion. Sponsors should educate their employees about the plan, encourage employees to join the plan, and promote the plan and its benefits. Plan sponsors should do this regularly. Employees should be educated on the available investment options. Investment information should be made available, as should annual enrollment notices. From the onset, participants need to understand the fees associated with different investment options as well as the fees associated with the plan itself.

Q: What kind of timetable do plan sponsors need to move on?

A: They need to move now. A year isn't an awful lot of time to get everything worked out and the plan document needs to be in place by Jan. 1, 2009. Plan sponsors should start with the plan document they have if one exists, identify their vendors and determine if consolidation will be necessary, form an investment committee to monitor the plan investments, and finally decide what kind of outside help is needed to handle the new fiduciary responsibilities. These are difficult considerations and there is not much time for plan sponsors to deal with them.

KARA TEDESCO is an employee benefits consultant in Milliman's Albany office.