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403(b)s Brace for Big Changes

With New Regs Still Six Months Out, Sponsors Have Work to Do

Big changes are brewing in the 403(b) world. For the first time in 40 years, the Internal Revenue Service is mandating new requirements that aim to make the plans more like 401(k)s.

For many 403(b) providers, the biggest challenge won't be figuring out how to meet the new requirements, but getting plan sponsors to start preparing early enough so the Jan. 1, 2009 deadline doesn't come as a shock.

"Half of plan sponsors have taken no action and many are not even familiar with the new requirements," said James Racine, assistant vice president and director of customer support strategy and products for Lincoln Financial Group's employer markets business section. "The biggest hurdle is for the non-ERISA plan market and employers who still don't embrace that they have to monitor plans."

Employers, also known as plan sponsors, seem to be waiting for their providers to provide an answer. Luckily for them, the top companies are already stepping up with educational mailings, webinars and comprehensive websites.

"It can be overwhelming if you don't know where to begin," said Linda Segal Blinn, vice president of technical services for ING. "We've made it as easy as possible for an employer to have a plan document."

Last July, the IRS issued final regulations concerning 403(b) tax-deferred annuity retirement programs, dramatically increasing the role of employers in governing investments, transfers, documentation, administration and participant disclosures.

Making these changes takes time, and the best providers offer checklists, toolkits and timelines to help sponsors meet the new information-sharing requirements.

"One size fits all does not work for clothing and it does not work for retirement plans either," Blinn said. "One public school may give their employees the chance to make Roth after-tax contributions, while others may make employer contributions to their employees' retirement accounts. The ING 403(b) Plan has the flexibility to let public schools tailor their plan document to meet their needs."

Lost in Cyberspace

"Once upon a time, if I was a participant and I wanted to move money to a vendor, I could just do it," Blinn said. "Participants could pretty much call the shots. With these new rules, the IRS has required a lot more employer involvement."

The IRS started auditing 403(b) plans in the late 1990s and found that without a monitoring program, a lot of information was disappearing into cyberspace, Blinn said.

The agency proposed new regulations in November 2004 to pull 403(b) guidance into one area, but they found themselves flooded by public comments, including thousands of letters and oral testimony.

The IRS pushed back the regulation's effective date several times, finally settling on January 2009.

Even six months isn't enough time for some educators who don't know where to start.

"Clients have to update their plan documents, but a lot of them haven't even had plan documents," said Angie Kyle, vice president of pension product management for TIAA-CREF.

"People count on us to make sure they are ready in time, and they also count on us to be ready," she said. "Our goal is to get everyone ready by November, even though the deadline is January. Many of our clients will be ready far in advance."

As an example, she said there are new requirements to qualify for hardship withdrawals and loans. A provider who has a good staff of ERISA-trained attorneys will be very valuable to plan sponsors who need to deal with complicated compliance issues, Racine said. Providers will need to help plan sponsors understand what the IRS limits are so they don't exceed them.

"Every single week, we are providing some level of communication," Kyle said. "Each client receives hands-on communication and assistance. I think plan sponsors are becoming much more aware of their responsibilities as a result."

Nation's 12,000 403(b)s' Running Head Start

Getting a jump on the rule changes will provide an advantage for early-bird employers.

Sponsors who wait until the third or fourth quarter to get started will find themselves wedged into a bottleneck with 12,000 other procrastinators, Racine said.

"You can't put a complicated plan like this in place in the last few weeks of December," Blinn said. "You have to allow enough time to communicate these changes to employees."

Not all 403(b) providers are excited about the changes. Last month, Pioneer Investments announced it was getting out of the 403(b) business and recommended its clients do business with AIG Retirement.

"With the effective date of the new regulations on the horizon, we are now facing a significant change due to the complexities of the regulations," Pioneer said in a memo. "After a great deal of analysis and consideration, we have concluded that advisers would be best served by teaming up with one of the leading companies in the 403(b) market."

Providers will need to do everything they can to get employers interested and excited about these changes.

Racine said Lincoln Financial is sending its salesforce out on the road in July to knock on doors, send e-mails and regular mailings, and hold live and webcast conferences around the country.

"It's going to be big," Racine said. "When you've serviced clients for all these years, you're going to be very busy with a regulation change like this. We have the resources and the know-how to handle these changes."

First Change Since 1964

"We've been in the 403(b) business for 40 years," Racine added. "This has been the first change in regulations since 1964. Our stance at Lincoln is that these providers have looked to us for advice and guidance for 40 years. We certainly aren't going to let them down now."

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