Craft a plan that is not only in compliance with the new regulations but one that also offers quality investment products at reasonably priced prices. Keep in mind that a plan that is in compliance but only makes available high-fee products is not a plan that best serves your employees.
- Understand that the 403(b) is for the benefit of employees, not vendors, and certainly not sales agents. This concept should be central to the plan design process. W. Scott Simon writing about 403(b) plan design for Morningstar may have said it best:
The ideal 403(b) plan should operate solely in the interest of plan participants and their beneficiaries for the exclusive purpose of providing them with retirement plan benefits.
- Understand that the new regulations shift power from the vendor (or financial industry) to the employer. Employers have the power to not only get their plan in compliance, but also to offer a lineup of quality investments.
- Become familiar with the new regulations.
- Determine plan data. Specifically, find out:
- Assets Under Management (AUM), or how much money employees have contributed to the plan. AUM data is particularly critical information because the financial services industry is paid on AUM. It is their measure of success. For the employer, this data can be used as a negotiating tool. Entities with larger AUM have more negotiating power.
- Annual contributions by employees, average account balances, total number of participants, total number of contributing participants, types of products sold, and investment fees and other charges.
We suggest you find out the above information from each current vendor.
- Put together a committee of not only benefits officials, but also participants to review your current plan and design a future plan.
- Formulate ideas for a Request for Proposal (RFP) spelling out plan requirements that will be presented to potential vendors. Make it a goal to not just get the plan in compliance but also to offer quality, reasonably-priced products. Some recommended RFP items to include:
- Group contracts without surrender charges — a group contract is between the vendor and the employer, as opposed to an individual contract, which is between the vendor and the participant. A group contract allows greater employer control of the plan and makes it easier in the future to move plan assets to another vendor. Such an arrangement increases the leverage of the employer for future vendor negotiations.
- Low cost no-load mutual funds featuring a mix of index funds and target date funds.
- Products devoid of surrender charges, especially rolling surrender charges.
- Decide whether to seek outside help in crafting an RFP and with addressing other plan demands such as the written plan document requirement. If you decide to do this yourself see our IRS Information section, which includes an IRS sample written plan document for public schools. Sources for outside help include an attorney, a Third Party Administrator (TPA), or a Consulting Firm. Whichever outside avenue you pursue be sure that the firm you are employing is not also selling financial product.
Note on using a Third Party Administrator (TPA): The main purpose of a TPA is to keep the plan in compliance. The TPA should generate compliance documents; interface with vendors; create, maintain and monitor the written plan document, and handle investment remittance. The TPA should serve as the main interface among all entities — the agents/advisors, vendors, employer and employees. The TPA's duty should be compliance, not selling products. Many firms are offering "plan solutions" are simply offering their TPA services as a means to gain or maintain a payroll slot in order to sell investment products. It is recommended that you seek out a fee-for-service TPA.
- Provide plan information to employees. More on this topic is available here.
- Continue to monitor your plan. Many employers will initially focus solely on plan compliance in advance of the new regulations. It will soon become apparent to many that they got it half right: a plan in compliance, but one that lacks quality, reasonably priced products.
- Still have a question? Post it on the 403(b)wise Discussion Board.
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IRS Links
Employer Resources
A Model 403(b) Plan (.pdf) by W. Scott Simon for Morningstar |
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