When regulation changed in 2007, many proclaimed the end of 403(b)s, but with the emergence of new technology and solutions, these plans have vastly improved. (Photo: Shutterstock)
The 403(b) plan has been around for more than five decades. That makes 403(b)s some of the oldest defined contribution plans on the market – but much has changed since they were first introduced. As retirement advisors, it's important to know the nuances of these plans and how they've evolved so you can properly inform your plan sponsor clients about specific compliance requirements, maximize your role, and support better outcomes for participants.
The advisor's role hasn't evolved much
In the beginning, 403(b) plans were retirement arrangements with only a fixed-annuity option: 403(b)(1) annuity accounts.
In those early days, employees would select their fixed-annuity option, the employer would deduct a pre-tax contribution from the employee's paycheck and forward the selection to the selected insurance company.
This process was driven solely by the employee, making the 403(b) arrangement similar to today's individual retirement accounts (IRAs).
Because of the individual nature of 403(b) retirement accounts, insurance companies and employers relied on advisors to educate employees on the pre-tax benefits of accounts, provide instruction on completing the salary reduction agreement with the employer, and help establish the account with the insurance company.
Since the inception of these plans, individual investment advisors have had a special relationship with 403(b)s and increasing participation in these retirement programs. Many employers today still rely on investment providers to offer education and establish accounts for participants.
But compliance mandates have evolved significantly
In 1974, the Employee Retirement Income Security Act (ERISA) was passed requiring 403(b) plans to provide certain disclosures and tax filings. In addition, employees could begin investing in custodial account arrangements.
Governmental 403(b) plans are, and always have been, exempt from ERISA, as state laws govern requirements of governmental-sponsored plans. The passing of ERISA shifted some employer oversight to nonprofit plan sponsors, which began a change in the role and responsibility of plan sponsors.
In 1986, the Tax Reform Act made several additional changes by creating rules, like those found in qualified plans, including the elective deferrals limit, nondiscrimination and minimum distribution requirements, and restrictions on withdrawals of salary reduction contributions.
The evolving role of plan sponsors could no longer be hands off. Employers had some regulatory oversight of their 403(b) plans though, by making sure employees did not exceed contribution limits.
In 2007, the IRS updated the 403(b) regulations for the first time since 1964. The changes required plan sponsors to have a written plan document, provide oversight of product selection, approve loans and withdrawals and ensure deposit and administrative rules are followed.
These widespread changes placed the plan sponsor in a clear fiduciary capacity and moved plan oversight closer to that of 401(k) plans.
However, 43 years of legacy cannot be changed overnight and traditions may not change at all. Many 403(b) plan sponsors struggle with legacy investment providers, investment options and the role of investment advisors within a plan.
Technology is changing the advisor's role in participant outcomes
As 403(b) plan sponsors struggle with the ever-evolving retirement market, new technologies are being introduced to aggregate plan products through master recordkeeping solutions that allow 403(b) plans to adopt modern-day solutions like auto-enroll and auto-escalation.
Advisors can assist plan sponsors with fund menu selection, creation of investment models and additional in-plan income solutions. They can work with participants to identify ways they can benefit from the retirement plan.
And they can also help participants determine if pre-tax or Roth contributions are better and if they can contribute more by utilizing the 15-year employment catch-up or the 50+ catch-up option, using them of course in the right sequence.
As we look through the history of 403(b)s, we may very well determine that these plans are not only different from 401(k) plans, but may also be substandard to them.
While the landscape is quite different than in the 1960s when these plans first came into play, it's key to understand the history in order to understand the evolution.
When regulation changed in 2007, many proclaimed the end of 403(b)s, but with the emergence of new technology and solutions, these plans have vastly improved, transforming the experience for plan holders overall.
Troy Dryer is Vice President of Business Development at Investment Provider Xchange (IPX), a single-source end-to-end solution for providers in the 403(b) and 457(b) plan markets. He has more than 25 years of experience in the retirement plan industry, serving in various management, sales, client relationship management and product leadership roles. His firm recently published an educational paper to help 403(b) marketplace participants better understand the compliance marketplace.
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