Cut 403(b) Retirement Plans a Break, ERISA Advisory Council Tells DOL

March 16, 2012 – 4:23 pm | By Gwen Cofield | Post a Comment

Government efforts to bring 403(b) retirement plans up to regulatory par with 401(k) plans has resulted in a rough transition for 403(b) plan sponsors, and in recognition of that fact, an ERISA advisory council gave the U.S. Department of Labor (DOL) five recommendations to help ease the compliance burden.


Over the years, many 403(b) plans have consisted solely of participant-owned annuity contracts and/or custodial accounts, under which employer involvement was minimal. But a significant shift occurred in 2007, when the IRS issued regulations that aligned 403(b) plans more with how 401(k) plans operate. In addition, DOL, based on Title I of ERISA, requires all ERISA 403(b) plans to annually file Form 5500 government reports. This includes a requirement that, effective for the 2009 plan year, 403(b) plans with 100 or more eligible participants must have their financial statements audited and attached to the Form 5500. Furthermore, DOL’s fee disclosure rules also affect 403(b) plans.

As the 2011 Advisory Council on Employee Welfare and Pension Benefit Plans noted in its report (dated Nov. 9, 2011, but issued this week), this has raised many challenges for 403(b) plan sponsors, which include:

  1. Section 403(b) plans can claim a “safe harbor “exclusion from Title I of ERISA if the plans consist solely of nonforfeitable voluntary employee contributions and earnings, employer involvement is sufficiently limited and plan participants are given a sufficient selection of investments and providers. However, plans seeking to maintain this exclusion and comply with the IRS rules are facing “additional administrative burdens, costs and a lack of clarity” regarding the safe harbor’s application.
  2. Plan sponsors or plan administrators may have very limited rights over participant-owned annuity contracts or custodial accounts. In such cases, the question becomes whether those contracts or accounts should be considered ERISA plan assets — which are subject to more stringent rules — once a participant terminates employment.
  3. Historically, 403(b) plans have had fewer reporting and disclosure obligations than 401(k) plans. Hence, “most private 403(b) plan sponsors have neither the monetary nor the personnel resources, or the fiduciary know-how to become well versed in the ERISA roles and responsibilities as they apply to the plan.”
  4. Regarding the Form 5500 and auditing requirements, many plan sponsors did not maintain, nor were required to maintain, appropriate participant and investment records. As a result, they have inadequate records for financial statement reporting purposes due to the inability to determine what contracts existed before Dec. 31, 2008.
  5. Some plan sponsors may not be sufficiently knowledgeable of their plans’ structure — like for example, whether the plan is covered by ERISA — or applicable regulatory requirements.


After reviewing the challenges and hearing testimony from government officials, and plan and service provider representatives, the council recommended that DOL should:

  1. Provide further guidance regarding the safe harbor exclusion, including making available to plan sponsors information and/or tools to help them determine the limitations on employer involvement and when a plan qualifies, or ceases to qualify, for the exclusion.
  2. Issue guidance stating that any individual contract, certificate under a group contract or custodial account that is transferred to a former employee ceases to be a plan asset if the employer has no further obligations or involvement.
  3. Provide a “fresh start” for 403(b) plans sponsored by private tax-exempt employers regarding certain ERISA reporting and disclosure requirements.
  4. Develop an alternative regulatory financial reporting approach to avoid an adverse or disclaimed audit opinion when the plan sponsor is unable to conclusively identify all contracts issued under the plan but held and controlled by a participant either as of Dec. 31, 2008 or, if later, the date the plan became an ERISA plan.
  5. Establish a more comprehensive educational and outreach effort for employers — particularly small ones — and service providers that will increase the information available on ERISA compliance requirements, plan administration and best practices for 403(b) plans.

Details on administering 403(b) plans based on IRS and DOL requirements can be found in The 403(b)/457 Plan Requirements Handbook, published by Thompson Publishing Group.


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