The final IRS 403(b) regulations introduced a number of new requirements for plan sponsors, the most significant of which clearly designates the plan sponsor as ultimately accountable for the plan's proper administration. To effectively administrate their organization's retirement plan, sponsors need to gather information from their plan's providers and examine and implement procedures for routinely acquiring plan information.

Information sharing requires retirement plan service providers to provide the necessary historical participant information, specifically regarding transactions, loans and hardship distributions, to the plan sponsor (or, in some instances, a third-party designated by the plan sponsor) to ensure compliance with IRS regulations pertaining to the administration of the plan.

It is perhaps the most significant aspect of the new regulations, since access to comprehensive participant data is the only way sponsors can ensure proper administrative oversight for their plans.

Historically, the 403(b) market can be characterized as a collection of individual annuity contracts issued by multiple providers. The plan sponsor acted as a conduit for payroll, feeding data to the providers; the typical 403(b) plan administration model was a decentralized process with each provider servicing their own participants, including overseeing transactions, loans, investment lineups and hardship requests.

Since plan sponsors had little, if any, direct oversight or responsibility, the risk of noncompliance was considerable. Participants were responsible for keeping track of their own maximum deferral limits as well as loan and hardship restrictions. Whether they were investing with multiple providers or a single provider, the plan's sponsor generally did not aggregate contribution amounts. Therefore, it was quite easy for limits to be exceeded, either intentionally or unknowingly.

In anticipation of the final regulations, 403(b) plan sponsors began to take action. Some opted to make their lives easier by significantly reducing the number of providers in their plans, sometimes reviewing not only a provider's ability to offer the necessary information for plan compliance, but also their investment offerings, fees and services. Others took matters a step further, consolidating with a single provider or moving to a third-party administrator that could offer open investment architecture as well as other plan services.


Challenges prompt changes

Information sharing has been a critical driver for plan decisions as sponsors look to meet their administrative plan responsibilities. Information sharing essentially involves a simple set of administrative functions and data collection. However, the manner in which information is captured and made available can vary widely among providers in a multivendor environment.

Many sponsors have found themselves at the mercy of providers and the quality of information they provide. This has led to considerable work for sponsors to create their own databases, hire a TPA, use the aggregation services offered by one of their providers or purchase customized applications to accommodate various file formats, forms and delivery timetables.

Despite the challenges, the new regulations have prompted many plan sponsors to take what may be a much-needed look at their plans, taking an active role to formalize fiduciary practices, create or revise investment policy statements and restate their plan documents.

Since the release of the final regulations, many sponsors have realized their overall fiduciary responsibilities would be easier to manage by implementing certain administrative procedures. Chief among these has been improved scrutiny of the plan's administrative expenses. Many plan sponsors have turned to their retirement plan adviser and those providers who understand the need for fee disclosure and revenue transparency to improve oversight and administrative management.


The road to the future

Even if a sponsor has eliminated some providers from the plan, that may constitute only the start for formalizing and organizing their information sharing requirements. If participants have maintained accounts with those former providers, sponsors still have the responsibility to gather participant data. Privacy laws and general concerns about identity theft make it even more critical for information to be stored and shared in a consistent and secure manner. Requiring a standardized approach from all providers with whom a sponsor is doing business is a necessity.

A 403(b) plan that offers multiple providers must have an efficient way to gather participant data and ensure participants do not violate any of the restrictions placed on their activities. Some of the most critical areas of concern are enforcement of limits on plan contributions, loans and hardship withdrawals.

As noted earlier, in the past, participants were able to apply for loans and withdrawals with impunity from multiple providers. Although this remains a legal issue for the participant, the plan sponsor is now also responsible for these types of compliance breaches.

To gather, manage and evaluate participant data effectively, plan sponsors are beginning to rely on third-party aggregation tools. Aggregation is essential to accurately monitor a participant's eligibility to take a loan or hardship withdrawal. The service combines all plan participants' financial retirement assets held with all plan providers into a single, consolidated view.

Compliance with the final 403(b) regulations is still relatively new, and sponsors will have a much better understanding of the transaction activity, as well as the needs of their plan and its participants, as they gain more experience. With the advent of open investment architecture, full revenue and fee transparency, and integrated communications from a single source, continuing to deal with several vendors can mean unnecessary complexity and work for the sponsor.

As a result, multivendor service models are likely to decline. In addition, ongoing information sharing among multiple vendors will likely dissipate over time, as "legacy" providers lose participant assets due to retirement.

As information technology continues to evolve, so will the processes and techniques for sharing retirement plan data. With every passing year, the challenges associated with collecting and disseminating information should become much less pronounced. Instead, sponsors will be able to focus on how to use information to better understand their participant base and make better decisions about plan features and services. -E.B.N.

Anthony Fego is the vice president of client integration at Diversified Investment Advisors. He and his staff are responsible for overseeing the implementation process for clients in the health care and nonprofit marketplace.

Register or login for access to this item and much more

All Employee Benefit News becomes archived within a week of it being published

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access