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Industry Braces for New 403(b) Regs

Wave of IRS Audits in January Could be a Bloodbath

AUSTIN, Texas - New 403(b) regulations are coming, whether or not plan sponsors and vendors are ready for the changes.

"This is different from anything we've ever done before," said Tom Peller, vice president of compliance for Fidelity Investments, at the SPARK Institute's 403(b) Plans Issues and Answers Forum here last month at the Hyatt Regency hotel. "In the past, when you had to do compliance, it was linear. You just checked things off one thing at a time. Almost all the changes in 403(b) regs are interconnected. Everything you change will impact something else. Your approach should be very different."

As of Jan. 1, 2009, the new changes mandated by the Department of Labor and the Internal Revenue Service will significantly alter the 403(b) funding model by shifting responsibility from vendors to plan sponsors.

The changes are part of an ongoing effort to make the non-profit, governmental 403(b) plans commonly used by school districts resemble the for-profit 401(k) plans used by nearly everyone else.

When the IRS first began looking into 403(b) plans, regulators were shocked to find that in many instances, the plans had as many vendors as participants.

Participants were allowed to pick their own providers, even if they hadn't been approved. Some people were taking hardship withdrawals from multiple vendors. Many 403(b) participants weren't even technically eligible to be in the plan. No one was really keeping track of where the money was going or how much was being spent on fees. Plan sponsors had little to no involvement. Things were a mess.

Under the new requirements, plan sponsors must maintain a written plan document that details eligibility terms and conditions, benefits, limitations, distributions and other provisions. The use of 90-24 asset transfers to unapproved providers will be phased out, though existing transfers will be grandfathered in, Peller said.

If a plan sponsor wants to have multiple vendors, those vendors need to have a formal contract to share information, including details about compliance, loan activity, hardship withdrawals and severance packages. Vendors need to stop procrastinating and start cooperating.

"Information sharing is at the heart of the new changes," he said. "This concept allows information to move around as necessary in a multi-vendor environment, while ensuring that limits aren't exceeded."

Dinosaurs Are Out

While the 403(b) industry has known about these changes for some time, a lot of people seem to be hoping that someone else will figure things out.

Several recent surveys have found that half of plan sponsors and vendors have done nothing to prepare, even as the Jan. 1 deadline draws closer.

"There are a lot of people out there who are not ready, and they might be telling you they are," said Andy Adams, a principal at the Atlanta-based Strategic Benefits Advisors. "A lot of vendors are hoping it all goes away."

This is not the school project you can put off doing all year and then try and cram everything into an all-nighter. Advisers warn that these changes will take months to implement, and you're in trouble if you haven't started already.

Vendors that adapt and embrace the changes will thrive, while those that don't will quickly lose assets and eventually go the way of the dinosaurs, Adams said. "You won't see them in the 403(b) business."

Plan sponsors are going to have much more leverage and be able to make more demands, he said. Many plan sponsors will realize that it's a lot more paperwork to have 100 different vendors for their plan, versus consolidating to five or six or even just one exclusive vendor.

"Vendors who get the message will bring new products and services to the market," Adams said. "Most plan sponsors are grossly overpaying for behind-the-scenes recordkeeping services."

Plan sponsors are looking for a vendor that can step up and take responsibility for compliance issues and that can give the plan sponsor real diversity without having to spread their assets around, Adams said. There's no reason why one vendor can't handle an entire plan under the new regulations.

"Right now we're seeing a lot of low-tech stuff and a lot of paper flying around everywhere," he said. "We will see a lot more paperless, high-tech stuff."

It's important to be ready by Jan. 1, but vendors and plan sponsors should make sure to leave themselves some flexibility, as there will be more changes to the regulations in the coming years-notably Form 5500, regarding plans with multiple active or frozen vendors.

Not Fooling Around