Navigating the Modern 403(b): Market Scale, Legacy Complexity, and SECURE 2.0

Plan sponsors evaluating providers should prioritize expertise with legacy annuity and custodial contracts, strong data-sharing capabilities (including SPARK and other formats), and participant education that supports informed consolidation decisions while avoiding conflicts of interest. SECURE 2.0 adds additional operational urgency by expanding hardship withdrawal sources, enabling (non-church) 403(b) participation in MEPs/PEPs, changing long-term part-time eligibility rules, and potentially broadening investment menus (e.g., CITs) subject to ongoing securities-law constraints.

403(b) plans frequently operate in a multi-vendor model, which increases information-sharing and coordination requirements among providers. Vendors are also closely watching the SECURE 2.0 Act of 2022 due to continuing uncertainty around implementation details and the need for potentially retroactive amendments. Non-ERISA 403(b) plans—common in K–12 settings—are often simpler to administer, but they may involve direct contracts with mutual fund companies rather than a single employer-controlled arrangement. In many states, “any willing vendor” laws require sponsors to coordinate with a master administrator who maintains accurate records, manages contributions, and supports legal compliance across participating vendors.

Legacy Accounts and Complexity

Many 403(b) arrangements include legacy individual accounts that are not employer-controlled, yet still require reporting and participant notices, which adds administrative complexity. As a result, recordkeepers often rely on third-party administrators to help support these plans and coordinate across historical vendors and contracts.

Recordkeeper Services

Recordkeepers are least likely to offer annuity investment management (34%) and common remitter services (44%). They are most likely to offer participant education (84%), plan consulting (78%), investment advice or guidance (75%), and mutual fund investment management (72%).

Church plans are also generally non-ERISA and may require recordkeepers to administer specialized distribution and tax handling, such as parsonage housing allowance distributions and related taxation considerations.

Selecting a Recordkeeper

When selecting a recordkeeper, sponsors should prioritize providers that understand legacy contract issues and can offer practical solutions for complex annuity and custodial arrangements. Recordkeepers should be able to educate participants about consolidation options while avoiding conflicts of interest, and they should be prepared to obtain data from prior vendors (or guide sponsors in gathering it) when historical records are fragmented. Familiarity with multi-vendor data sharing is essential, including experience with the SPARK format (used by 63% of providers) and other formats (used by 50%).

Fiduciary and Compliance Support

403(b) plans historically operated with less fiduciary oversight until the 2007 regulations increased formal governance expectations. Recordkeepers can support sponsors by helping them navigate plan documents and adoption agreements, and by assisting with selection and administration of plan features when sponsors do not have full-time compliance consultants.

Other Considerations

Sponsors should also evaluate provider and investment fees, the quality and suitability of available investment options, and opportunities to improve participant engagement.

Key SECURE Act 2.0 Provisions Affecting 403(b) Plans.

Hardship Withdrawals (Section 602)

Under SECURE 2.0 Section 602, 403(b) plans may allow hardship withdrawals from nonelective and matching contributions (including earnings), as well as from earnings on elective deferrals. Previously, hardship withdrawals were generally limited to elective deferrals and excluded earnings. This update aligns 403(b) hardship distribution rules more closely with 401(k) rules and is effective for plan years beginning after December 31, 2023.

Multiple Employer Plans (MEPs) and Pooled Employer Plans (PEPs) (Section 106)

Section 106 allows 403(b) plans (other than church plans) to participate in multiple employer plans (MEPs) and pooled employer plans (PEPs), enabling unrelated employers to join a single plan to seek administrative efficiencies and potential cost savings. This provision is effective for plan years beginning after December 31, 2022.

Long-Term, Part-Time Employee Eligibility

Beginning with plan years after 2024, 403(b) plans must generally allow long-term, part-time employees to participate after completing two consecutive 12-month periods with at least 500 hours of service. Service before 2023 may be disregarded for eligibility and vesting purposes.

Collective Investment Trusts (CITs)

SECURE 2.0 amends the Internal Revenue Code to permit 403(b) plans to invest in collective investment trusts (CITs) and unregistered insurance company separate accounts, which may offer more cost-efficient investment options. However, securities-law limitations may still restrict 403(b) plans from using these investments until further legislative changes are enacted.

Automatic Enrollment

SECURE 2.0 expands automatic enrollment concepts to increase participation, including for 403(b) plans, with the intent of improving savings outcomes for younger and lower-paid employees. Existing 403(b) plans are generally grandfathered, and exceptions may apply for small or new businesses, church plans, and governmental plans.

Other Changes

Beyond these headline items, SECURE 2.0 includes a range of required and optional changes affecting both 403(b) and 401(a) plans, including plan amendment deadlines and administrative simplifications.   SECURE 2.0, signed into law December 29, 2022, introduces significant changes for section 403(b) tax-sheltered annuity plans, which are similar to 401(a) plans but are sponsored by public schools or non-profit entities.

Hardship Withdrawals 

Hardship withdrawals may now extend beyond elective deferrals: 403(b) plans can allow hardship distributions from nonelective and matching contributions and related earnings, not just from elective deferrals. Administrators may also accept a participant’s written declaration affirming the hardship, which can simplify administration and enable electronic certification where appropriate.

Multiple Employer and Pooled Employer Plans

403(b) plans (except church plans) may participate in MEPs and PEPs, allowing pooled administration and potential cost savings across participating employers. In addition, a loss of tax-qualified status by one participating plan generally does not affect the other plans in the MEP or PEP.

Eligibility of Long-Term Part-Timers

The eligibility period for long-term, part-time employees to make elective deferrals is reduced to two consecutive 12-month periods, and the rule is extended to ERISA-covered 403(b) plans for plan years after December 31, 2024. Because many 403(b) plans already operate under the universal availability rule, the change may not dramatically expand eligibility in practice, but sponsors should review plan terms and consider whether enhanced hours tracking for part-time employees is needed.

Investments in Collective Investment Trusts (CITs)

SECURE 2.0 allows 403(b) plans to invest in collective investment trusts (CITs), which could expand investment menus and potentially reduce costs. However, federal securities laws may still restrict CITs from holding 403(b) plan assets, so broader access is unlikely unless additional legislative or regulatory changes address that barrier.

SECURE 2.0 permits 403(b) plans to hold collective investment trusts (CITs) and unregistered insurance company separate accounts, which may be more cost-efficient than mutual funds, although securities law may still restrict practical use. Beginning in 2024, expanded hardship distributions may include earnings on elective deferrals as well as qualified nonelective and qualified matching contributions (and earnings), further aligning 403(b) rules with 401(k) rules.

Separately, required minimum distribution (RMD) rules shift the starting age to 73 for individuals reaching age 72 after December 31, 2022, and to 75 for those reaching age 74 after December 31, 2032, along with additional technical adjustments and reduced excise taxes for missed RMDs. Employers may also be able to offer Roth elections for employer contributions (subject to vesting requirements), provide matching contributions based on qualified student loan repayments starting in 2024.

SECURE 2.0 Act: Key Changes for 403(b) Plans

Multiple employer plans (MEPs) and pooled employer plans (PEPs) are now available for 403(b) plans (except church plans), which can simplify administration and may reduce costs, and a qualification failure in one participating plan generally does not affect the others.  This is effective for plan years beginning after December 31, 2022. Hardship withdrawal rules for 403(b) plans are updated to better align with 401(k) rules by allowing hardship distributions to include certain earnings and additional contribution sources, and participants may self-certify hardship through a written declaration, generally effective for distributions for plan years after December 31, 2023. SECURE 2.0 also permits 403(b) custodial accounts to invest in CITs for amounts invested after December 27, 2022, although practical availability remains subject to securities-law constraints. Overall, these changes are intended to modernize 403(b) administration and bring key features closer to 401(k) norms, with additional implementation guidance expected and with potential differences in timing for certain public school arrangements.

SECURE 2.0 Act: Key Changes for 403(b) Plans

SECURE 2.0 introduces several new penalty-free distribution options for 403(b) and other defined contribution plans. These include relief for participants impacted by federally declared natural disasters, access for individuals diagnosed with a terminal illness, and earlier access for certain public safety-related roles (including specified governmental corrections and forensic security roles and certain private-sector firefighters) under defined conditions. The Act also adds penalty-free withdrawal concepts for personal emergencies and domestic abuse situations (subject to statutory limits and plan administration rules), and contemplates penalty-free distributions for payment of certain long-term care premiums with an effective date that phases in later.

Natural Disaster (Qualified Disaster Recovery Distributions)

For qualified disaster recovery distributions, eligibility generally requires the participant’s principal residence to be in a federally declared disaster area during the incident period and that the participant sustained an economic loss due to the disaster. The maximum distribution is $22,000 per disaster (aggregated across eligible arrangements), and the distribution generally must be taken within 179 days after the later of the incident period start or the disaster declaration date. These rules apply to disasters occurring on or after January 26, 2021.

Terminal Illness

For terminal illness distributions, the participant must generally obtain a physician certification stating that the illness or physical condition is reasonably expected to result in death within 84 months (7 years), with supporting information and signature requirements. The provisions apply to distributions made on or after December 29, 2022, and repayment may be permitted within three years, subject to plan administration and applicable rules.

 Corrections Officers, Forensic Security Officers, and Private-Sector Firefighters

Certain corrections officers and forensic security personnel employed by state or local governments, as well as certain private-sector firefighters, may qualify for penalty-free distributions at age 50 after separation from service, with additional rules for some public safety employees who have at least 25 years of service. These provisions can apply to distributions from 401(k), 403(b), and governmental 457(b) plans, subject to plan terms and eligibility requirements.

Personal Emergency Expenses

Personal emergency expense distributions are intended for unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses (for example, certain medical costs, casualty loss, or imminent eviction/foreclosure situations), and participants may be able to self-certify eligibility. The limit is generally one distribution of up to $1,000 per calendar year, and repayment may be permitted within three years; additional emergency distributions during the repayment window may be restricted unless repayment occurs.

Domestic Abuse

For domestic abuse distributions, eligibility generally requires that the participant experienced domestic abuse by a spouse or domestic partner within the prior 12 months, and self-certification may be allowed. The maximum distribution is generally the lesser of $10,000 (indexed) or 50% of the participant’s vested account balance, and repayment may be permitted within three years, subject to plan rules.

Long-Term Care Premiums

For long-term care premium distributions, the Act contemplates distributions of up to $2,500 per year (indexed) to pay premiums for qualifying long-term care insurance coverage, with key definitions (such as “high quality coverage”) expected to be clarified through future guidance. The provision has a later effective date (noted as January 1, 2026) and would generally exempt eligible distributions from the 10% early withdrawal penalty while still subjecting them to ordinary income tax, subject to plan implementation.

Conclusion 

The 403(b) market remains large and operationally complex, particularly in K–12 and other non-ERISA environments where multi-vendor arrangements and legacy individual contracts can complicate oversight and data collection. Sponsors can reduce friction by selecting recordkeepers and master administrators with proven experience in multi-vendor data sharing, legacy contract remediation, and participant education. SECURE 2.0 increases the need for disciplined plan administration by expanding distribution rules, enabling pooled plan structures, and introducing eligibility and investment-related changes that may require new processes and vendor coordination. Together, these factors make provider capability, compliance support, and implementation readiness central to effective 403(b) plan governance.

Bridgebay Financial, Inc. advises employer retirement plans including 401(k), 403(b), 457, profit-sharing, and defined contribution plans—on investment policy statements, committee charters, asset allocation, investment style selection, fund selection, ongoing monitoring, and provider evaluation. The firm’s advice is delivered through consultations with Retirement Committees and does not involve discretionary account management services.  Bridgebay creates Investment Policy Statements that provide a disciplined framework for plan governance, due diligence, and compliance with ERISA, DOL, and other regulations.  These policies set plan objectives, authorities, responsibilities, and controls, and are reviewed annually to help fiduciaries fulfill their responsibilities.  

Bridgebay conducts asset allocation and gap analyses to ensure fund lineups are diversified, efficient, and meet 404(c) requirements, identifying gaps or redundancies in fund offerings.  The firm evaluates fund menus for cost-effectiveness, asset class representation, and alignment with participant demographics and preferences, including socially responsible investments.  Advanced quantitative tools are used to assess target date and target risk funds, comparing them to benchmarks and peers to help sponsors understand performance.  Fee analysis is a core service, with Bridgebay ensuring fee transparency, benchmarking expenses, and assisting sponsors in renegotiating or recapturing fees for improved plan value.  

Ongoing monitoring are emphasized, with quarterly reviews and user-friendly reports provided to Retirement Committees.  Bridgebay’s proprietary scoring system, proactive meetings, and vigilant oversight support prudent governance and help plan sponsors make informed decisions.