With the upcoming final regulations due under 403(b), there is a definite need to re-think how 403(b) documentation is structured. For a variety of reasons, mostly historical and marketplace driven, there is no generally agreed set of practices for how to get documents in place that actually meet the requirements of 403(b) and are consistent with the complex of plan structures that has evolved over time.
The marketplace is likely to evolve in these directions over time, so this post is something of a roadmap for the future. At least, it should provide a template of issues you can raise with your provider when the final regulations come out. (And, of course, how we will be working with our clients.)
THE THREE PLAN TYPES
There are three distinct program types in the 403(b) world, as opposed to just two in the 401(k) environment. Each of these types has different documentation needs, so let's look at each separately.
ERISA Plan
A 403(b) that seeks to be or admits it is a plan subject to ERISA is, in many ways, the simplest type to figure out. These plans almost always limit investments to a single array, within the setting of a single group annuity contract or a single TPA administration structure. This means that, like an ERISA 401(k) plan, they need (1) a plan document, and (2) a funding vehicle. Group annuity contracts regularly provide both where they are the selected investment medium (subject to my concerns about whether they are amended on a timely basis). Otherwise, the plan needs a plan document and a pooled custodial account agreement that comply with 403(b)(7) (all in mutual funds, plan document controls over custodial account agreement, etc.). Given the possibility that there will be prior annuities in place with distribution restrictions, and the possibility that an employer would allow an opener to individual annuities, the plan document probably ought to permit the plan administrator to designate more than one investment vehicle or at least to grandfather existing funding arrangements.
Non-ERISA Plan
There are also 403(b) programs that are plans, but not subject to ERISA, because the employer itself is not an ERISA employer (technically, the exemption is for governmental and church plans under a bizarre and complex set of definitions). These are going to require either (1) a separate plan document that excludes ERISA rules, or (2) a master document that has provisions for ERISA and non-ERISA plans. There is no particular technical reason to pick one of these over the other. The single document is easier to draft and to draft from, but has provisions that do not apply to non-ERISA plans, while the two-document choice has less extraneous materials for non-ERISA plans. Given the implications of not having a remedial amendment period, and the better quality control inherent in a single document, we have opted for a single, combined master plan.
Oh, and don't forget church plan retirement income accounts as a third investment medium.
Non-Plan Programs
Mostly for cultural reasons, there is a genuine fear of plan status in 403(b) culture. There is good reason to attribute this mostly to fear-mongering in a marketplace where a lot of small insurance agencies make money from individual 403(b) annuities, but it is real. Setting aside all the negative effects on employees of not having any assistance from employers with, hopefully, better expertise, there it is an there it will remain for some time.
This creates an entirely new type of 403(b) program, the non-plan program or arrangement. Even ERISA-exempt employers try to maintain this status, and one of the central marketplaces, school districts, normally have to do so by state law. Otherwise, the structure tends to be fixed by the requirement of the DOL's definition of "pension plan".
Normally folks want to see these programs as simpler. For starters, they are all salary reduction-only, so there is no need to cover things like matching contributions or vesting. For another, there is no need to comply with ERISA requirements, except to the extent that analogous rules are placed in the final 403(b) regulations. However, the investment side, and the effects of the market structure, create offsetting complexities.
In this marketplace, and program type, there are multiple, unrelated investment providers, most of whom are offering single annuities. Each of these single annuities purports to comply with 403(b), although they are rarely amended on a timely basis to reflect changes in the law. However, none of them provides any of the aggregate limitations resulting from the fact that 403(b)(5) says, and has always said, that multiple contracts are treated as a single contract. Nor do they have to have common provisions about such essentially employer issues as withholding and timing of contributions.
After some hemming and hawing, we came to the conclusion that this program type needs a separate document type. Essentially, the need is for a program document that (1) says it is not a plan (ours calls itself a personnel policy), (2) includes overall limitations to be applied under all funding vehicles, in the aggregate, on contributions, loans and distributions, (3) contemplates the addition and removal of specific annuities, custodial account arrangements and retirement income accounts as funding vehicles, and (4) includes the definition of a non-plan under the DOL regulations, where applicable. Procedures under such a program would also be required, along with cooperation from investment providers, to ensure compliance with the aggregate limitations, but that should become a standard part of the "common remitter" function, as we are prepared to do.
So there we are. Reasonable minds can differ, but it is clear that the decisions we have made will keep our clients in compliance.
This is going to be an important subject, but it is unlikely that anybody will write much about it when the final regulations come out. Accordingly, I am going to pst this on my blog (403b-457plansblog.blogspot.com) for regular readers and at the 403bWise and BenefitsLink bulletin boards. My hope is that the bulletin board postings will generate discussion, and point out the flaws in this posting. At least, they will create forums where I can clarify the underlying reasons and how our system will work.
Tom Geer
Subscribe to:
Post Comments (Atom)
GeerTom,
ReplyDeleteThanks for the post, I think it will become more and more relevant the closer we get to the new regs being finalized and go in to effect.
My question or confusion is on the "non-plan" program. First, who is "we" and second, if the new regs call for a plan document, how and why would a school district design a "program document" that specifically states it is not a plan?
I'm not so sure a simple "common remitter" is able to handle the real compliance duties that come with operating a "plan". We won't know much until the IRS issues the final regs, but at this point they seem to be saying that the plan document can be a series of documents. Thus, I think it would be interesting for us to put out heads together and determine exactly what those documents should be, who should provide them, in what format, and how often. In addition, I think it will no longer be possible to simply have an "approved vendor" list, it will have to be taken to another level - that of an "approved product" list.
It also seems to me that vendors are not able to properly police themselves and even if they are, the district would be put in a difficult position to rely on vendors to do the right thing....that is, to coordinate loans and ensure they are paid off (For every defaulted loan in a 403(b) I've come across, perhaps only 1 of 4 have actually been reported or reported correctly), to approve hardships, and to approve transfers to approved products. It seems to me the district, or its TPA needs to sign off on this type of stuff because they are the only ones capable of having a global view of the plan.
Would love to hear your comments. This is a good debate to begin as the new regs get closer to being finalized.
ScottyD
As for Plan Docs, I'll get the list started:
List of All Approved Vendors, Agents, and Products
Prospectus for Variable Contracts, Mutual Funds
Custodial Agmt for Mutual Fund accounts
Specimen contracts for all annuities
All specific forms for each product - such as withdrawal, loan, etc.
Everything in PDF Format and posted for all to see.
ScottyD
Hey, ScottyD, welcome. For those of you who don't recognize the name ScottyD is an active, and excellent, commentator on 403(b) bulletin boards.
ReplyDeleteThe program concept is an attempt to use the plan word less. First, too many employers are afraid of having a plan. Second, we need some term to describe multi-vendor, non-plan environments. I use plan to mean plan in the technical sense and program to refer to non-plans or both.
If you're afraid of being a plan, but you have to have some writing, call it a program and say in it that it's not a plan. My reading of the proposed regulations is that you have to have a writing, but that the writing does not make the program a plan, or an ERISA Plan.
I agree with you that the common remitter function as historically understood does not meet requirements. We are changing the function to include the employer-level things that need to be done in a multi-vendor environment, such as documentation, review of deferral amounts, and initial review of hardships and loans. Common remitter just happens to be the industry term closest tot he concept. We are also developing an employer toolkit, if the employer wants to undertake these tasks itself.
We, by the way, is Benefit Plan Solutions, which is, largely, me. I work extensively with AMI Benefit Plan Administrators, and they are co-developing the enhanced common remitter function.
I think I agree with your approved product comment. However, I am not an investment professional, so I don't want to review investments as such. At the very least, where the employer, a common remitter or a TPA undertake the 403(b) compliance responsibility, the investment providers will have to toe the line. And the employer, or somebody for the employer is going to have to develop a way to require that, including probably the willingness to throw them out.
I'm not quite as keen on limiting investment providers based on investment results. Typically, I think, bad results result from excessive fees, and I hope employers will undertake, or hire somebody to undertake, the task of getting and disclosing all fees (including mutual fund, trust company and insurer internal fees) and getting the results out to employees. And I certainly believe that all vendors should have to give to employers all relevant specimin contracts.
Your last paragraph before your signature is really, in my though structure, part of the enhanced common remitter thing. Nobody can expect employers to learn about 403(b), and they are going to end up, usually, hiring somebody to do this. That person, in turn, to properly handle deferral limits and loan repayments, almost has to be the common remitter.
Last, I love the idea of document sharing. I'd like to add fee collection and disclosure tools. Any thoughts on how to implement the concept?
Tom