New 403(b) rules give employers more control
The long-awaited final 403(b) regulations should be released by the Internal Revenue Service (IRS) at the end of June with a general effective date of January 1, 2008, according to Robert Architect of the agency’s Employee Plans Division. A key feature of the new rules is expected to be the requirement that employers create a plan document defining the plan’s rules, a step that could effectively make employers responsible for managing and operating the plans.
With written plan documentation, the employer may be held responsible for monitoring excess contributions, eligibility, loan repayment, and documentation for hardship withdrawals, areas where the IRS has found common errors in the operation of 403(b) plans. The IRS has published a checklist for 403(b) plans at http://www.irs.gov/pub/irs-tege/pub4546.pdf that previews some of the fine print that will be found in the new regulations.
The new rules are also expected to call for a greater fiduciary role on the part of the employer, which could lead to increased scrutiny of plan offerings and the costs of plan offerings, changes that should benefit employees.
Currently in many plans the employer works directly with approved financial services companies, making transfers and contributions. The employer does not always review the transaction before it takes place. These financial services companies offer a range of investment options – primarily fixed and variable annuities and mutual funds --but often charge comparatively high fees for their services, MarketWatch says.
Elaine Immerman, associate general counsel for TIAA-CREF, which manages more than half of the assets in the 403(b) market, says that the IRS wants more employers to take centralized control of these plans. “The IRS is looking for 403(b)s to be run more like qualified plans [such as 401(k)s] and they’re trying to do it through these regulations,” she says, according to MarketWatch.
But learning to live with 403(b) plans that operate more like 401(k)s will require a big change in the employee’s mindset.
“The old days of an employee being able to pull money out of their 403(b) because they want to buy a new car are coming to an end,” said Davd Blask, a senior pension consultant with Lincoln Investment Planning in Wyncote PA, according to MarketWatch, adding, some “employees treated their 403(b) as a glorified savings account.”
Employers will find themselves with administrative burdens under the new rules. An ERISA and Employee Benefits Alert published by BDO Seidman LLP suggests that employers offering 403(b) plans begin preparing for compliance with these new regulations by:
1. Creating a plan document;
2. Listing all of your current § 403(b) vendors and narrowing that list;
3. Creating an advisory board for your § 403(b) plan consisting of key employees; and
4. Setting up procedures to allow you to continually monitor your vendors.