403(b) Overhaul First Since 1964
IRS Experts Urge Preparedness for 403(b) Changes
September 8, 2008
AUSTIN, Texas - Making sure your company's 403(b) retirement plan is in compliance by Jan. 1, 2009 can be a daunting task, especially if you haven't gotten started yet.
The new regulations by the Internal Revenue Service and Department of Labor loom as a ticking time bomb to some plan sponsors and vendors prone to procrastination, but IRS officials say the changes are meant to improve the plans, not frighten employers.
"We have no intention of going out and doing an extensive number of audits next January, nor do we have plans to increase the number of 403(b) audits we're doing now," said an IRS official, who asked not to be identified, in an interview with MME.
The current IRS codes governing 403(b) plans were written in 1964, said a second IRS official. While Congress has made some major changes in the law since then, the IRS hasn't really done anything to update the regulations in more than 40 years. It's time for a change, the official said.
The key changes to the 403(b) plans are a written plan document requirement, formal information-sharing agreements between vendors, and the elimination of 90-24 transfers to unapproved providers.
Unlike 401(k) plans, 403(b) plans currently do not have these requirements, making it very difficult for plan participants to see what they're invested in, how their money is being distributed and how much they are paying in fees.
Because some of these plans can have hundreds of different vendors, it can be nearly impossible for participants to keep track of their accounts, and nearly impossible for vendors to keep track of which participants are taking loans and hardship withdrawals. In some cases, employees have taken hardship withdrawals from multiple vendors for the same hardship.
These new requirements should eliminate these problems, but implementing them can require a complete overhaul of the 403(b) mindset.
For the estimated 50% of plan sponsors and vendors that haven't yet started work on this complicated, months-long project, it may almost be too late to beat the January deadline, but that's no reason not to start now.
"The IRS wants those documents in place on Jan. 1," said Elaine Immerman, associate general counsel for TIAA-CREF, at the SPARK Institute's 403(b) Plans Issues and Answers Forum here last month at the Hyatt Regency hotel. "This process can take years to implement. Nobody thinks [the timeline] is very realistic, even the IRS."
Many industry experts are terrified that the IRS will unleash a tidal wave of audits in January to catch noncompliant plan sponsors-one executive even referred to IRS auditors as "winged monkeys"-but the IRS official said that is unlikely.
"Even if we wanted to, it would be very surprising to see it happen," he said. "I can't ever recall an instance where the minute something became effective we started auditing. An audit is the review of books and records. We typically do audits down the road, a couple of years behind the effective date. While this rule takes effect in January 2009, we may not get to look at a plan until 2010 or 2011."
The IRS announced the changes in July 2007, giving plan sponsors 18 months to implement the changes. The IRS does not plan to extend the Jan. 1 deadline, but may grant individual extensions.
Heads in the Sand
While half of 403(b) plan employers still "have their heads stuck in the sand," 25% acknowledge they will have to do something soon, and the remaining 25% are well down the path to compliance, said Jim Racine, assistant vice president and director of customer support strategy and projects for Lincoln Financial Group.
Under the old requirements, vendors ran the 403(b) plans, while confused employees struggled to understand their investments and employers sat on the sidelines, doing nothing. All this will change with the new regulations, as employers are forced to take a larger role in managing the plans.
"Employers are reluctant to get involved, but they are going to have to have some involvement," said David Kolhoff, senior counsel for Lincoln Financial.
Current 403(b) participation rates are dismal_about 40% to 60% involvement, Racine said_compared to the much higher 401(k) participation rates of 70% to 90%. These new changes will make the two types of plans much more similar, leading to an expected increase in 403(b) participation rates.
"We're going to see lower-cost products on the market," Racine said. "There may be less profit and some commissions may get cut, but if participation rates go up, and there are fewer vendors, your piece of the pie goes up."
Many 403(b) plans have a ridiculously large number of vendors compared to 401(k) plans. Plan sponsors attending the Austin conference acknowledged that many vendors are part of their company's plan because of "good-old-boy" ties, and cutting them loose would be way too political in their community.
Reorganizing a plan to meet the new compliance requirements is the perfect opportunity to shed that dead weight and consolidate vendors, experts say.
"Compliance will be more complicated with multiple vendors," Immerman said.
In order to make sure the plan is in compliance, vendors need to communicate with one another and share information about participants. There are plenty of vendors that are capable of providing exclusive services to a plan sponsor.
"Employers will have to rely on vendors for information," Kolhoff said. "Employers will have to have confidence that vendors and providers can stay in compliance."
It may be difficult getting multiple vendors to cooperate, and smaller vendors may struggle more with the high costs of adapting to the new rules, but these changes are coming, whether companies are ready for them or not.
"Embrace these changes," Racine said. "Be the solution. Show how you fit in the new world. Make sure you're flexible, and be aware of what your peers are doing."
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