403(b)s Relieved From SEC Rule in Certain Situations

Information on Thomson’s explains that 403(b) contracts that offer variable investment funds are subject to the jurisdiction of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940. Because of this, 403(b) investment contracts must be “registered” with the SEC and are treated very similarly to mutual funds offered for sale to individuals outside of retirement plans.  

One requirement of being an investment company is that an individual’s financial interest in those companies must be able to be freely distributed at any time. However, this causes a potential problem with 403(b) plans. The Internal Revenue Code requires that certain distribution restrictions be placed on all contributions to a 403(b) custodial account and on elective deferrals made to annuity contracts.    

In 1988, the SEC issued a no-action letter stating that it would take “no action” against 403(b) plans that impose these distribution restrictions, as long as: 

• the prospectus includes a disclosure about the distribution restrictions; 
• the sales literature includes information about the distribution restrictions; 
• anyone selling the product specifically to the participant brings the distribution restrictions to his or her attention; and 
• each participant signs an acknowledgement of the distribution restrictions before making a contribution. 

Rebecca Moore
editors@plansponsor.com