Viewpoint: 403(b) Fair—Promoting Greater Transparency for 403(b) Plan Fees
By Anthony Agbay, The Agbay Group
Until recently, the market for 403(b) defined contribution plans—which can be sponsored by public-sector educational institutions, including universities, nonprofit charitable organizations (including many hospitals), Indian tribal organizations and churches—was like the Wild West, where anything goes. Over the past few years, new 403(b) regulations have changed the landscape significantly. While multivendor plans remain an option (unlike single vendor 401(k) plans), the 403(b) regulations require plan sponsors to adopt a written plan document and ensure that the plan operates in accordance with its terms. In addition, new mandatory procedures include limits on contributions and distributions and requiring a third-party administrator to monitor employee eligibility.
When the regulations were being considered, many opined about their likely impact for good or ill. Now that they are in place, actual outcomes can be indentified and discussed.
Many of the pension plan limitations will change for 2013 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, the catch-up contribution for employees age 50 and over remains unchanged. The IRS indexed dollar limits to qualified retirement plans for 2013 are provided in the table below.
Why didn't the age 50 and over catch-up contribution change?
The Consumer Price Index for all Urban Consumers (CPI-U) is the gauge used to determine if limits increase. The inflation rate is measured from the third calendar quarter of the prior year to the third quarter of the current year. This rate will determine the inflation factor to apply to the limit for the following calendar year.
The challenge with the age 50 and over catch-up is the amount is indexed in increments of $500, which is a large percentage of $5,500 (9%). The CPI-U has to increase over 9% for this limit to be raised. Compare that to the 402(g) limit, where the CPI-U only needs to increase by more than 3% ($500 divided by $17,000) for that limit to increase. Since the CPI-U has not increased anywhere near 9% in recent years, a few years must pass before there is an increase in the age-50 catch-up amount.
WASHINGTON 12/23/2011 — Nearly 160 million workers will benefit from the extension of the reduced payroll tax rate that has been in effect for 2011. The Temporary Payroll Tax Cut Continuation Act of 2011 temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through Feb. 29, 2012. This reduced Social Security withholding will have no effect on employees’ future Social Security benefits.
Employers should implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.
Employers and payroll companies will handle the withholding changes, so workers should not need to take any additional action.
TDFs are not created equal. Too often, they are comprised of proprietary funds that restrict fiduciary oversight, and proposed DOL regulations will add transparency, but won’t affect a plan’s underlying strategy. Plan sponsors should review their investment options, analyze the "glide paths" of the funds and ensure that the strategy chosen best suits the needs and demographics of plan participants.
Bear markets make for greater scrutiny in the financial markets and, more specifically, financial products. However, just as many regulations seem to come after the damage is done (i.e., the legislation that followed the Enron crisis), the same fate may await target-date funds.
Fiduciaries in Focus:
Shielding Plan Fiduciaries from Participants’ Investment Losses
2012 is the year of a regulatory tsunami affecting plan sponsors at many different levels. As the dust settles, plan sponsors and consultants should refocus on the main issues at hand regarding defined contribution retirement plans: process and protection.
ERISA section 404(c) relieves the plan sponsor and other fiduciaries of defined contribution plans from liability for losses resulting from participants’ direction of their investments if certain conditions are met. Specifically, if the DOL 404(c) regulation is followed, an ERISA plan fiduciary will not be liable for the investment elections made by plan participants but will still be responsible for exercising prudence in the selection and monitoring of the investment products offered under the plan.
Compliance with ERISA section 404(c) regulation is voluntary. However, I have not met a plan sponsor, when properly explained the protection afforded under this section that did not want to take advantage of it.
Let me put it differently; if a company chooses not to be a 404(c) protected retirement plan, plan fiduciaries could be held professionally and personally liable for every investment decision and all the losses each employee makes in his or her 403(b), 401(k) or other defined contribution plan. When viewed from that perspective, I can’t imagine any retirement plan sponsor willing to subject him or herself to potential liability by voluntarily opting out of such protection. Most plan sponsors don’t voluntarily decline protection but essentially opt out unknowingly by violating the required procedures and notifications.
To take advantage of ERISA section 404(c) protection, the plan must satisfy three categories of requirements:
- Investment menu requirements
- Plan design and administrative requirements
- Information and disclosure requirements
There are more than 20 duties included in these three requirements and, unfortunately, many plan sponsors and plan consultants violate several including the “holy grail” of requirements – participant notification.
A statement the plan is intended to be an ERISA 404(c) plan, with an explanation that this will relieve plan fiduciaries of liability for losses resulting from the participant’s investment directions is required to be given to all participants. This notification puts the employees “on notice” that they bear the consequences of their own investment decisions while relieving the fiduciaries.
Plans Fall Short
I recently conducted an informal survey of 20 plan sponsors asking them if:
- They are a 404(c) plan and
- Do they comply with the requirements?
Of the twenty, seven did not even elect to receive this protection and none of the remaining thirteen ever provided the required participant notification. Without the required notification, compliance with all the other requirements is insignificant. Although, this is a small sample, I believe it is representative of the misinformation provided by many plan vendors and retirement plan consultants on this subject.
Here are a few suggestions on best practices in complying with ERISA Section 404(c):
- Indicate this properly on form 5500 - this puts the DOL on notice that your plan intends to comply and receive the safe harbor protection.
- Maintain documented proof of your participant notification requirements – you must put the participants on notice. If you have not done so, there are ways to remedy this.
- Follow a prudent process and checklist for monitoring and documenting your approach to satisfying the three categories of requirements noted above.
- If you are using the services of a third party consultant, make sure your consultant is a retirement plan specialist and not an investment generalist. Many common problems in meeting regulatory requirements can be traced to a lack of expertise in this area.
- Don't Rely on your service provider to fulfill your duty. Since service providers do not act as fiduciaries in this capacity, it is your duty to comply with the required notifications.
If you have any questions or would like a 404c checklist or sample notification language, please contact Anthony Agbay.
Anthony Agbay is president of The Agbay Group, an independent retirement plan consultant specializing in fiduciary oversight strategies and retirement plan services.