Contrary to expectation, many 403(b) plans–particularly those in the private non-profit space–have actually made it a point to embrace a boatload of complex regulations from the U.S. Treasury Department and the Internal Revenue Service (IRS) that came at them in 2007 and as a result, are starting to increasingly resemble their 401(k) counterparts.
Aaron Friedman, national practice leader, non-profit, at Des Moines, Iowa-based Principal Financial Group, believes this momentum is set to continue. The regulations, which took effect in 2009 and were issued by the Treasury Department and implemented by the IRS, represented the biggest regulatory action on 403(b)s in over 40 years, and addressed such areas as plan documentation, investment transfers, non-discrimination rules, and application of limitations. They are rigorous and require an effort to understand and implement, Friedman says, yet a greater number of plans have been making it a point to adhere to the fiduciary requirements that the regulation calls for.
"On the non-profit [403(b)] side, we are seeing a greater adherence to ERISA," he says. "We are seeing plans looking to centralize control and offer features like automatic enrollment and matching contribution. A greater number of plans are being modernized and enhanced as a result of this regulation with the general idea being that 'if we turn this plan into a valid employee benefit, then we can both attract and retain employees.'"
Principal Financial Group sponsored Chicago-based Profit Sharing/401(k) Council of America's (PSCA) recently released survey of the 403(b) world. The "2010 403(b) Plan Survey" showed that 57% of plan sponsors made changes to their 403(b) plans because of new regulations. That is a higher percentage than the 41% that said they planned to make changes when the same survey was conducted in 2008.
"It's clear from the survey that there's been a lot of changes to the system than people originally anticipated making, and the good news is that significant progress has been made in the 403(b) space," says David Wray, PSCA's president. "However, the 403(b) system is large and it will take years for the entire system to come into compliance with the new regulations. It takes time for people to understand what the rules are and what to do about them, but the good news is that we have come a long way."
One of the main changes that has been implemented as a result of the regulation is the consolidation of providers to 403(b) plans–an issue that had raised several red flags in the past.
"Our data indicated that for folks in this survey, 78% have one provider, 11% have two, 7% have between three and five and four have six or more," Wray says. "This was a big one because some of these folks used to have many, many providers with different contracts and they had no consistency of reporting results. People clearly indicated that there were more choices than they thought they would make, but one of the choices they did make was reducing the number of providers."
