In the wake of the final 403(b) regulations, as well as subsequent IRS guidance in Revenue Procedure 2007-71, 403(b) plan sponsors, along with their legal counsel, are busily reviewing and making decisions regarding their plans in preparation for the January 1, 2009 general effective date of some important new requirements. An important part of such a review is determining what options are available.
For many 403(b) plans, particularly those sponsored by public schools, plan compliance historically has been decentralized, relying primarily on a bundled provider approach. Under such an approach the providers of the contracts and accounts (which were already required by the Code to incorporate most of the specific compliance rules, including limitations on loans, distributions and deferrals) were also required to administer those compliance requirements.
For certain requirements, such as loans and minimum required distributions, those providers were permitted to rely upon a participant’s representations regarding certain information relative to other accounts maintained by the same participant. Plan sponsors were thus able to leverage existing expertise particularly with contract and account providers that had dedicated resources to such compliance processes.
For some plan sponsors, alternative approaches may have included selection of a single provider for both investments and services (this generally was not possible for public schools in a handful of states), or selection of a third party to provide an overlay of administrative processes, which might have included facilitating contributions to multiple providers, a function often referred to as “common remitter.” If this third party was also a provider, or if it was affiliated with or had a related business relationship with a provider, questions frequently arose as to whether the plan services were sufficiently insulated from the marketing efforts of the related or associated provider. This discussion often has been discussed using terms such as “vendor neutrality,” and its importance to plan sponsors appears to have grown over time.
Plan sponsors considering the range of compliance alternatives may have focused on a number of key considerations, including:
- General efficiency and effectiveness
- Employee choice of investment products
- Vendor neutrality
- Privacy of participant data
- The ability to reduce or eliminate significant day-to-day functions of the plan sponsor
- The ultimate cost to participants, who frequently are required to pay for additional plan services from a party other than their investment provider
A review of the final 403(b) regulations as well as more recent guidance in IRS Notice 2007-71 (which included both model plan language for public schools and additional transitional guidance and relief) finds each of the existing solution models (fully decentralized using bundled providers, fully centralized using either one or multiple providers, and hybrid approaches between these two) alive and well. Specifically, both the final regulations and the model plan language make clear that the plan sponsor is free to choose how to structure its compliance procedures. Thus, for example, there is no requirement that the plan sponsor itself review and approve such transactions as transfer, loan or distribution requests. It will be important, however, for the plan sponsor to make decisions about who will provide such review and approval, and then to document those procedures and structure agreements accordingly.
It is also important to note that each of these available compliance alternatives is likely to require modification in light of the final regulations. Fully decentralized compliance will require coordination among providers in place of reliance on participant representations for certain information. Fully centralized compliance will take on new duties that may be very foreign to standard centralized processes because it will frequently require some of that same coordination with certain previously deselected providers. An alternative which includes elements of both centralized and decentralized processing might involve a two-step process with centralized oversight of plan-wide compliance followed by decentralized processing of individual transactions.