Exploring the Choices

Options that simplify the running of a non-ERISA 403(b) plan.

The 2023 PLANSPONSOR 403(b) Market Survey estimated that ERISA governs roughly just one-quarter of 403(b) plans. Non-ERISA plans usually have limited sponsor involvement beyond deducting funds from each participant’s salary and forwarding those funds to the plan’s providers.

Most non-ERISA 403(b) plans traditionally have used tax-sheltered annuities in which each employee had an individual annuity account rather than a plan level account, according to Doug Guillory, president of third-party administrator 403(b) Partners in Cumming, Georgia. “403(b)s in the non-ERISA space are participant-level accounts,” Guillory explains. “There's no commingling of their assets. Each participant has their own account and their own contract.”

Sponsors’ limited involvement in their non-ERISA plans created a gap in tracking participants’ salary-deferral levels, loans, and distributions. IRS regulations, published in 2007, addressed the tracking problem by requiring plan providers to start sharing information to monitor participant compliance. Plan sponsors could coordinate and monitor the shared data internally, but that approach needed sufficient staff and expertise. Another option was outsourcing part or all plan administration and compliance to a third party, such as common remitters and centralized data collectors. Those outsourced solutions, offered by providers and TPAs, have evolved to include multiple services for sponsors.

Common Remitters

Participant-level arrangements with multiple vendors can create challenges for payroll departments, Guillory explains. He cites the example of a school system whose employees use six plan vendors. That arrangement requires withholding employees' deferrals, writing six separate checks to the providers, and sending six data files to those providers monthly. ERISA-governed 403(b) plans with multiple plan providers or participants holding legacy annuity contracts face the same problem.

Hiring a common remitter service reduces employers’ administrative workload. Daren Holverson, senior director of non-ERISA operations with West Jordan, Utah-headquartered National Benefit Services, explains that with a common remitter, the employer withholds the employees’ funds with each payroll run. It sends one payment for the total amount withheld to the common remitter, which forwards the funds to the designated providers.

Common remitters can provide additional administrative services. For example, when companies change their name, address, or remittance format, remitters can handle the operational details. "As a common remitter, we track all those changes and take that administrative burden off the plan sponsor,” says Holverson.

Information Sharing

Information sharing agreements dictate the terms under which providers can share participants’ account data with third parties. James Olson, managing director with IPX Retirement in Englewood, Colorado, explains that information-sharing “defines the format and the rules for sharing information between the plan sponsor, recordkeeper and investment providers.” Guillory gives an example of a public school system working with three providers. The school system's information-sharing agreement authorizes the providers to share data with Guillory's company, which collects and consolidates the data as a TPA. 403(b) Partners can then monitor participants’ accounts for compliance with deferral, loan, and distribution rules. Such agreements also include details on employee eligibility and contribution amounts. Holverson explains that National Benefit Services’ contracts with providers include details on fund remittance procedures and provider contact information to use if questions or problems arise.

However, data-sharing can pose problems if parties use different file formats and naming conventions. To avoid that problem, in the late 2000s, the SPARK Institute published 403(b) plan information-sharing best practices that specified standardized information and file layouts. Providers’ adoption of these best practices fulfilled the IRS requirements for information-sharing and facilitated data exchanges. “We get SPARK file layouts from all our vendors,” says Guillory. “Then we can create employee websites to show if an employee has an account with Lincoln Financial and one at Voya, for example. They can see the balances with both because we've consolidated that record into one participant experience.”

Centralized Data Gathering

Employees may have accounts at multiple providers, such as in cases where the employee changed providers and left funds with the previous provider. Providers and TPAs offer centralized data-gathering services to consolidate plan participants' data from multiple providers in one location. “Centralized data gathering is the platform or technology where the aggregated data file lives,” Olson explains.

Brodie Wood, senior vice-president and national practice leader of healthcare and education markets for Voya Financial in Kaysville, Utah, cites Voya’s planwithease.com® service as an example of centralized data gathering. The service summarizes participants’ accounts with all their providers. It also reviews and approves requests for loans and withdrawals based on the rules for the plan in which the participant has accounts. “The data are brought in from all the providers into one warehouse and centralized, and then that solution will review the transactions and approve them based upon the plan rules,” he explains. ““You can] think of that as the fully outsourced or fully centralized solution.”

National Benefit Services offers centralized data gathering. Holverson says that any transaction processing, especially loans and hardship distributions, requires the administrator to have account information to calculate maximum loan or hardship eligibility. “We get the account information from the different providers, put it into our system, and when somebody does want to take a loan, we're able to access any account that they have across all these different vendors,” he says. “Because of that SPARK information [standardization] in our system, we know if they have any outstanding loans and their highest balance over the last year. We do the calculations based off that information and their account balance.”

Choosing Services

Providers and TPAs can offer employers multiple plan administration services based on what the employer needs, says Fred Makonnen, head of distribution, group retirement at Equitable in Cleveland, Ohio. In many instances, Makonnen favors a "full end-to-end" TPA. “In addition to providing ease of administration, the primary function of a TPA is to ensure the school districts’ supplemental plans are being governed in accordance to IRS rules,” he explains. “An IRS audit can be extremely costly and time-consuming, a luxury most school districts simply do not have. A full service, neutral TPA—a non-investment product provider—will preemptively address and take corrective actions before a plan is at risk of being non-compliant.”— Ed McCarthy