Cleaning Up Loose Ends for 403(b)s

Speaking at the 66th Annual Plan Sponsor Council of America (PSCA) Conference, Vince Rainforth, vice president for the Tax-Exempt Market at Principal Financial Group, said tax-exempt 403(b) plan sponsors still face challenges including knowing whether they are or if they want to be governed by the Employee Retirement Income Security Act (ERISA), adopting a written plan and governing plan processes, having too many points of contact for participants, managing participant activity and terminating plans when they include contracts with withdrawal restrictions. George Fraser, managing director at Retirement Benefits Group, interjected that, rather than terminate a plan, it would be easier to keep it and run it as 401(k)s are run.

According to Fraser, 403(b) plan sponsors and fiduciaries need to catch up to the standards of 401(k) sponsors and fiduciaries for plan design and governance, selecting and monitoring investments and fees. He said 403(b) plan sponsors have the same goal as 401(k) plan sponsors—to help participants get retirement ready—so they need the same help from advisers. Rainforth added that many tax-exempt do not know what they don’t know and many have never used an adviser.

Fraser said 403(b)s need investment policy statements, plan or investment committees that meet quarterly and a fiduciary file cabinet. Rainforth said they also need fiduciary liability insurance.

In addition, Rainforth suggested employee education best practices—a consistent message, one-on-one advice and measurement of results of communications. He said it would also help to consolidate from multiple providers to one to help participants see what they have rather than get different statements. “At least consolidate to one statement for participants if there are multiple providers,” he stated.

Tax-exempts also struggle with how to deal with the costs of running a good plan and providing an employer match contribution to motivate employees to save. Rainforth suggested amending the 403(b) plan to make employer contributions discretionary. In addition, he noted if the tax-exempt also has a defined benefit (DB) plan, which has a greater than 100% income replacement ratio for employees, it can consider lowering that cost if employees also have a 403(b) and a non-qualified plan to generate retirement savings.

Rainforth said there are multiple plan types at almost every tax-exempt. “If you can bundle all these together, you can offer a better opportunity for employees to save,” he concluded.