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403(b) Group Updates Best Practices

Streamlining, better disclosure expected to boost participation rates

With a little cooperation, 403(b) retirement plans for educational and governmental workers can move even closer to resembling their 401(k) counterparts, become more streamlined and boost participation, but first, industry participants will need to agree on best practices for the plans that will help everyone speak the same language.

Prior to the new 403(b) rules that took effect in January, organizational practices were pretty rudimentary, said James Racine, assistant vice president for Lincoln Financial Group.

The key changes to the 403(b) plans were a written plan document requirement, formal information-sharing agreements between vendors, and the elimination of 90-24 transfers to unapproved providers.

Before the changes, 403(b) plans did not have these requirements, which made it very difficult for plan participants to see what they were invested in, how their money was being distributed and how much they paid in fees.

When the Internal Revenue Service first began looking into 403(b) plans a few years ago, regulators were shocked to find that in many instances, the plans had as many vendors as participants.

Under the old system, vendors ran the 403(b) plans, while confused employees struggled to understand their investments and employers sat on the sidelines, doing nothing.

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.

The changes that took effect in January represent the first major changes to 403(b) plans since 1964. While the general consensus is that the changes are a significant improvement, the new rules from the IRS and Department of Labor inevitably left a lot of gaps. So far, the companies have been filling the holes in a piecemeal fashion.

For example, aggregation and common remitter services are trying to send vendors upgraded payroll information, but each service has developed its own format, Racine said. Employers and vendors often work with different aggregation and common remitter third parties, and they are scratching their heads, trying to comprehend all the different competing formats.

"Prior to 2009, there was very limited employer involvement," Racine said. "There was limited information provided in these plans, which was typically just a name, Social Security number and the remittance amount."

New options like automatic and default enrollment are now available in 403(b) plans, but these options require significantly more information than the plans had previously provided.

The SPARK Institute has been developing and updating a set of best practices to serve as a standard industry guide, but keeping all the changes current has been a dynamic, constantly evolving process, said Larry Goldbrum, general counsel of the Spark Institute.

Goldbrum said his group is coordinating the updates, with help from fund companies and plan sponsors. He characterizes the newest version as v. 1.04.

"The general consensus is that we have to set a standard," he said. "We wanted to create best practices that are flexible, so that service providers and aggregators can provide the services they want to."

Racine said managing all the new formats and people involved in the process has created a number of difficulties, particularly since there are so many different types of plans. There are small plans, large plans, ERISA plans and non-ERISA, to name a few, and they all have different needs. One size doesn't fit all, he said.

"In the past, each service had its own format," he said. "With the best practices, all vendors will get a specific format of common remitter."

Getting everyone to speak the same language won't be easy, but coordination will be essential going forward, he said. Developing a common standard for information-sharing will result in more efficiency and will be crucial to the continued success of these plans.

The benefits of getting everyone to speak the same language are enormous, Goldbrum said, but industry best practices that provide one simple format will help get everyone on the same path. The best practices can be found at

"We should be pushing vendors to accept this one format," Racine said. "These benefits won't be realized unless people adopt them. Employers who have multiple vendors should be asking their vendors and partners to comply with these best practices."

Racine said some employers use only one vendor, but the best practices recommend using multiple vendors.

"We are hoping aggregators, common remitters and third-party administrators will accept these best practices," he said. "To implement a change like this is going to take all of us working together. We hope to see broad acceptance."