Compliance October 7, 2019

New York Investigating Sales of Annuities to 403(b)s

With New York being an influencer, some say it will prompt other states to do the same.

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There have been several reports, starting with a Wall Street Journal article, announcing that the New York State Department of Financial Services is planning to investigate sales of annuities in the 403(b) retirement plan market.

403(b) plans were limited to investing in annuities until 1974 when the Employee Retirement Income Security Act (ERISA) allowed for investing in custodial accounts, permitting the plans to use mutual funds as investments. IRS regulations passed in 2007, requiring more plan sponsor involvement in their plans, led many 403(b) plan sponsors to move to a new model, reducing the number of vendors (or recordkeepers) used by the plan and stopping new investments in annuities. However, annuities still exist in the plans by legacy vendors since they are individually owned and require plan participant direction to move funds and often participants are charged surrender fees. The market segment that still most uses annuities for plan participants is the K-12 403(b) plan market.

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The Wall Street Journal reported October 2 that the Department of Financial Services sent letters to a dozen major insurers requesting information about their sales practices. It is looking into whether agents are engaging in deceptive and unfair sales practices, such as failing to appropriately disclose product costs and merits.

403(b) plans governed by ERISA already have a duty to disclose fees and conflicts of interest. However, non-ERISA 403(b)s, such as those in the K-12 education market do not have these duties. In 2017, Connecticut passed a law requiring non-ERISA 403(b)s to disclose the fee ratio and returns, net of fees, for each investment offered to participants. It also requires service providers to disclose conflicts of interest. Connecticut decided to pass the law after Connecticut teachers regretted investing in certain products without being informed of fees and other charges.

The traditional design of 403(b) plans, allowing vendors to meet individually with participants to set up annuities resulted in many plans having an unwieldy number of vendors associated with the plan. Industry sources argue that not only is this administratively difficult for plan sponsors with the new rules for plan oversight, but it is more costly for participants, as mutual funds are a cheaper investment.

Plan sponsors cannot force participants out of annuities, but since the 2007 regulations, some K-12 403(b) plan sponsors have pared down the number of approved vendors for their plans or consolidated into one. However, some state laws, including a recent one in Pennsylvania, prevent a single-provider model for K-12 403(b) plans.

There’s been a tug of war, of sorts, over the best design for K-12 school district 403(b) plans, but some say they should strike a balance between old and new.

Sources cited in some news articles about New York’s investigation into sales of annuities in the 403(b) retirement plan market say it’s a positive step that will benefit plan participants. And, with New York being an influencer, some say it will prompt other states to do the same.
Compliance October 7, 2019

IRS Establishing Recurring Remedial Amendment Periods for 403(b) Plans

Revenue Procedure 2019-39 also provides a limited extension of the initial remedial amendment period for certain form defects.

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In April 2013, the IRS issued Revenue Procedure 2013-22 establishing a pre-approved plan program for 403(b)s and offering a remedial amendment period for 403(b) plan documents. The last day of the remedial amendment period for 403(b) plans is March 31, 2020.

Now, the IRS has issued Revenue Procedure 2019-39 setting forth a system of recurring remedial amendment periods for correcting form defects in 403(b) individually designed plans and 403(b) pre-approved plans occurring after the initial remedial amendment period ends. It also provides a limited extension of the initial remedial amendment period for certain form defects. The IRS says issues that cannot be retroactively amended may be corrected under its Employee Plans Compliance Resolution System (EPCRS).

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Rev. Proc. 2013-22 provides that the IRS expects future guidance to require the restatement of 403(b) pre-approved plans every six years. Accordingly, the new revenue procedure establishes a system of 403(b) pre-approved plan cycles under which an entity offering a pre-approved plan document may submit a proposed 403(b) pre-approved plan for review and approval by the IRS.  Once approved, the plan may be made available for adoption by eligible employers. 

Revenue Procedure 2019-39 also provides deadlines for the adoption of plan amendments for 403(b) individually designed plans and pre-approved plans.

In the revenue procedure the Department of the Treasury and the IRS announce they intend to issue additional guidance, prior to the date that 403(b) pre-approved plans may next be submitted for review, relating to the system of recurring remedial amendment periods and the system of recurring pre-approved plan cycles.

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