(b)lines Ask the Experts – Ensuring Compliant Transactions in Multi-Vendor Plans

“However, I have not received a precise explanation as to why this is the case. Could the vendors work with each other or a third party to ensure compliant transactions?”   

Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:    

It would seem that it would not be a difficult task to solve the issue of 403(b) transactional compliance, but it is indeed a major administrative concern at this point in time, for a variety of reasons.   

First of all is the nature of 403(b) itself. Most of the transactional rules, such as those for loans and hardship distributions, were written for 401(k) plans, where assets generally reside in a trust with a single investment provider or at least a single recordkeeper, directed by the employer. 403(b) plans, on the other hand, are generally an amalgam of individual contracts that are NOT controlled by the employer. Indeed, in the worst case scenarios, employer level recordkeeping is not possible, so a vendor might not even know, for example, which contract holders with loans are employees of employer X under plan Y,  let alone be able to coordinate that information with other vendors as is required under the final 403(b) regulations.   

Even if the loan or other transaction information is known, a second issue is being able to share that information electronically and in real time with other vendors, or with a third party that would coordinate transactions.  The 401(k) industry has over decades developed fairly standard recordkeeping formats to allow different investments to be recordkept under a 401(k) trust.  Not so the 403(b) industry.  The Society of Professional Administrators and Record keepers (SPARK), an industry organization to which many vendors belong, has worked diligently on a standardized format for 403(b) since the 403(b) regulations came out, but some vendors have been either unwilling or unable to use that format.    

It’s Complicated  

Finally, the loan limits themselves are not as simple as a lot of people think.  When tracking them accurately, they can be difficult to understand, let alone successfully administer. For example, let’s take this nugget from Code Section 72(p) regarding loans:  

“72(p)(2)(A) GENERAL RULE. --Paragraph (1) shall not apply to any loan to the extent that such loan (when added to the outstanding balance of all other loans from such plan whether made on, before, or after August 13, 1982), does not exceed the lesser of -- 

72(p)(2)(A)(i) $50,000, reduced by the excess (if any) of -- 

72(p)(2)(A)(i)(I) the highest outstanding balance of loans from the plan during the 1-year period ending on the day before the date on which such loan was made, over 

72(p)(2)(A)(i)(II) the outstanding balance of loans from the plan on the date on which such loan was made, or 

72(p)(2)(A)(ii) the greater of (I) one-half of the present value of the nonforfeitable accrued benefit of the employee under the plan, or (II) $10,000. 

For purposes of clause (ii), the present value of the nonforfeitable accrued benefit shall be determined without regard to any accumulated deductible employee contributions (as defined in subsection (o)(5)(B)).” 

Complicated enough for you?  Then take into account other rules (Did the participant have a prior loan default?  Are there any other plans of the employer with loans?). And this is just the Code.  For ERISA plans, there are separate ERISA provisions as well, with some different restrictions. And, once you do understand the rules, you can see how there are certain complexities built into them that are not exactly recordkeeper-friendly (the requirement here to track outstanding loan balances for a full year just to determine the amount which can be borrowed is one of many hurdles).   

Though this is not meant to be a comprehensive digest of all the issues that face providers in this regard, the Experts hope that you can see why transactional compliance for loans is one of the greatest challenges that multiple-vendor 403(b) plans face today. In addition, even if you work with one provider, these complexities can affect your plans as well, as long as assets remain with providers that you may have utilized in the past (though certain 403(b) assets with inactive providers can be excluded from the plan) or if you have other plans with loans.