Nicholas Zaiko, CIMA
403(b) Fiduciary and Compliance Requirements
The Employee Retirement Income Security Act (ERISA) of 1974, enforced by the Department of Labor (DoL), established fiduciary responsibilities for plan sponsors. Although some retirement plans may not be subject to ERISA, it is still best practice to follow those high fiduciary standards when managing non-ERISA plans. All ERISA and non-ERISA plans must also comply with IRS regulations.
IRS regulations, effective 2009, changed 403(b) plans from essentially employee-controlled and directed, tax-sheltered accounts to integrated, full-service retirement plans whereby the plan sponsor now has fiduciary responsibility and liability for the prudent operation of the plan for the benefit of the participants.
Since 2009, both ERISA and the IRS have required a written plan document for the 403(b) plan that includes detailed information on plan eligibility, benefits, contribution limits and distributions. The plan document should be reviewed and updated periodically and be consistent with the operation of the plan. The plan document is then communicated to participants through an updated summary plan description (SPD).
The plan's legal counsel should review the documentation and amend the plan document periodically as regulations change. Plan sponsors can retain plan document services for creating, modifying or updating plan documents and remaining compliant with IRS and Department of Labor regulations.
Employer-funded 403(b) plans must meet statutory universal availability requirements and pass nondiscrimination tests, including new rules for control groups. The IRS requirements were established to ensure that all eligible employees have access to the plan and receive an equitable distribution of plan benefits without favoring highly compensated employees versus rank and file participants.
ERISA 403(b) plans became subject to IRS Form 5500 (Annual Return/Report of Employee Benefit Plan) filing requirements. 403(b) plans with over 100 eligible participants at the beginning of the plan year, generally, must have their financial statements audited by an independent auditor.
Monitor Plan Transactions
Plan sponsors with multiple vendors should establish a process to ensure that contributions, distributions and other participant transactions meet their the IRS limits. They should monitor participant transactions such as loans and hardship withdrawals across vendors to ensure they comply with IRS and DOL regulations.
Information sharing of transactions and participant-directed asset transfers are generally limited to authorized fund providers that share information with the plan sponsor. Transaction monitoring helps the plan sponsor comply with IRS rules and ensures employee contributions and distributions are correct.
Plan sponsors can retain compliance monitoring services provided by recordkeepers to help minimize risk and ensure plan compliance in such areas as loan and hardship withdrawals, contribution limits, nondiscrimination and universal availability.
Sponsors should implement a process for notifying employees, as required, about plan eligibility, enrollment readiness, contribution limits, QDIAs and other information.
Noncompliance is Serious
Noncompliance can subject the plan sponsor and the participants to a range of adverse outcomes. Depending on the severity of the violation, failing to comply with regulations may result in significant fines against the plan sponsor or even disqualification of the entire plan, making all plan assets taxable.
If the plan sponsor does not monitor or limit plan contributions or distributions, there may be penalties and taxes due for participants that exceed the IRS limits.
Every plan sponsor should strive to implement best practices in the administration and oversight of the 403(b) plan by establishing a comprehensive set of policies and procedures that are consistently followed. Adherence to these procedures should support a well-thought out process that reduces fiduciary risk for plan sponsors.
Prudent oversight should encompass plan governance, rational plan design, consistent oversight and compliance.
Plan governance should be documented with policies that specify fiduciary responsibilities, accountability, roles, and procedures. For compliance purposes, specific roles should be clarified, documented and accountability established for varying responsibilities.
All designated fiduciaries should understand their status, duties and potential personal liability for any fiduciary breach. The plan should have an Investment Committee that oversees the investments. An Administrative Committee would make decisions on plan design, benefits, and employer contributions.
Plan sponsors should review periodically the plan design to incorporate new features as regulations change, plan demographics evolve, and new services become available to the plan. They should consider the impact of automatic enrollment, automatic deferral, re-enrollment and automatic deferral increases as provided for under the Pension Protection Act of 2006 (PPA).
Another design feature is to add a Qualified Default Investment Alternative (QDIA) to ensure that participant balances are properly invested when they do not make an investment selection for their contributions.
An investment policy statement establishes the guidelines for selecting and monitoring plan investments, 404 (c) compliance, plan fees and monitoring service providers. Fiduciaries should consider using experts such as independent retirement plan investment consultants that serve as fiduciaries to develop investment policy guidelines, assist with investment menu design and conduct annual investment reviews.
The investment options available to participants should ensure broad diversification to help balance risk and return for all investor types.
By following a prudent and consistent process to demonstrate how each investment was selected for the plan to benefit its participants, plan sponsors can meet their fiduciary obligations. Once selected, investments should be monitored for performance against relevant benchmarks and fees.
A well-diversified fund menu should address the needs of different types of participants. An investment line-up should include a variety of investment options, each with different objectives, benefits and risk profiles to serve a wide range of participant needs. A good line-up would include a range of investment vehicles that enable the participant to create a unique asset allocation. Asset allocation options are well-suited for participants that prefer to have their investment decision managed professionally. Finally, guaranteed income options that are designed to provide retirement income may be an effective way to provide participants nearing retirement with a steady stream of income.
Plan sponsors can provide education and advice for participants using a full range of educational programs that offer individual objective advice, webinars, publications, online tools and educational resources. The quality, impartiality, and effectiveness of these programs should be monitored by the plan sponsor.
An annual plan review can identify areas for improvement and ensure that the plan is being operated effectively. Reviews should cover areas such as plan participation, asset flows, service quality, cost, transaction activity, participant satisfaction, education, fees and investment performance. By consolidating multiple providers to a single provider, plan sponsors gain greater control, flexibility and cost-efficiency. Plan sponsors’ role in meeting fiduciary and compliance requirements through an efficient and optimal plan design will produce better retirement outcomes for their participants.
The plan sponsor’s role as a fiduciary should focus on strategies that mitigate risks associated with fiduciary responsibilities and compliance issues. The risk of not operating a 403(b) retirement plans in a compliant manner have increased as regulations continue to change and evolve.
Bridgebay, an independent retirement plan consultant is dedicated to advising plan sponsors and assisting plan sponsors in meeting their fiduciary and compliance obligations, offering plan design solutions with proven results and providing access to objective advice and guidance for employees. Bridgebay serves as co-fiduciary to its plan sponsor clients.