The Employer Get Wise Guide to the New 403(b) Regs New 403(b) regulations which will go into effect January 1, 2009 offer employers a unique opportunity to drastically improve the quality and cost of their 403(b) retirement plan. What follows is an employer guide for capitalizing on this opportunity to create a plan worthy of your most important asset: your employees.     State of the 403(b) Currently, 403(b) plans are beset by an over-reliance on high-fee insurance-based products. As of 2006, close to 80% of the $652 billion dollars invested in the 403(b) was parked in annuity products. Of this amount, 34% was invested in variable annuity products. Not only are fees typically much higher in variable annuity products (see chart below), but onerous surrender charges lasting on average seven years are often imposed on unwitting consumers. At the K-12 level, local and national unions have endorsed high-fee vendors in exchange for monetary compensation. Equally egregious is the all-too common practice of "educating" participants via a sales pitch in the lunchroom, and/or "educating" benefits officials at dinner or on the golf course. See: Why Schools Lack Low-Cost 403(b) Investment Choices for more information.   How Fees Impact Return Value after 35 years, assuming $250 contributed monthly with an 8% average annual return (source: Meridian Wealth Management):   Demand of New Regulations For the first time in forty years the IRS has updated the rules and regulations of the 403(b) [see press release]. The following will be required of employers as part of the new regulations: Creation of plan documentation spelling out rules of plan — for the first time employees will have access to transparent employer-created plan information Universal availability notification — employer must regularly notify all eligible employees of their ability to participate Restrictions added to transfers and an end to "old style" 90-24 transfers after September 24, 2007     Steps to Take First, get a handle on your current providers. Find out exactly what types of products and services are being offered and exactly what fees and surrender charges are being imposed. Next, find out exactly how much money your employees have invested in your plan. This is known as Assets Under Management. As this story describes, you can then use this information as leverage to garner fee reductions and an end to surrender charges. Put together a committee of not only benefits officials, but also participants to review your current plan and design a future plan. Create a request for proposal RFP (see sample below) spelling out requirements and distribute to potential vendors. Offer true employee education — this could be in the form of an employer created website and/or literature, and/or education seminars hosted by employees or those not affiliated with vendors.     Third Party Administrator (TPA) to the Rescue? Reputable TPAs exist ready and willing to assume some of the administration burden. The utmost caution is urged, however. Scrutinize any TPA that promises no-cost administration; and/or offers product. Reputable, low-cost mutual fund companies have been known to offer TPA services at little or no cost while still offering low-cost product. The key to making such a scenario a success is to require that the firm indeed offer low-cost product [See: The "Free" Fallacy of TPAs].   Urge to Go With Same Old Same Old There's a real temptation to continue with the usual cast of high-cost providers. Many have already approached employers with promises of smoothing the transition to the new regulations. Such promises have a real allure because on the surface they make a benefit official's job easier. But what happens when employees start asking tough questions about vendor selection after the fact? What happens when employees file lawsuits questioning the quality and validity of the vendor selection process? Employers would be wise to protect themselves by engaging in a transparent process that truly puts the needs of the participant front and center. If the same old vendors are truly of value, make them compete for your valuable business. It is highly likely that such a demand will result in a lowering of fees, and an end to surrender charges. We have heard from benefits officials who report that vendors are only too happy to lower costs in order to retain their lucrative 403(b) business. Your employees are counting on you. Do you have the courage to do the right thing or will it be business as usual?   Employee Education Another critical aspect to consider is employee education. Who is going to provide this? If it is being done by a vendor then there exists an inherent built in bias, particularly when commission-based agents and representatives are involved. It is our belief that education should never occur in a sales environment. Unfortunately, this has all too-often been the case with the 403(b). We have several resources and services available to help educate employees. The first, of course, is this website. We encourage employers and employees to take advantage of the wealth of information available here. We also have bulk pricing for our book Teach and Retire Rich which has been praised by Vanguard founder John Bogle and teachers alike. Employers, vendors, unions, and pension systems have ordered large quantities for employees and participants. Finally, we put on Teach and Retire Rich Seminars that have been described as "personable and easy to understand", "humorous" and "clear and to the point."   Employer Goal At the end of the process you need a plan that is both in IRS compliance and provides employees with access to quality, reasonably priced products devoid of onerous surrender charges. Ideally, you also arrange for some type of education devoid of a sales component. To prevent lawsuits from disgruntled employees [See: 2 Teachers Sue Union Over Retirement Plan] it is imperative that the entire process be transparent and focused on providing quality investment options to employees. Reducing current vendor glut down to one poor choice is not an improvement. Some employers are instead choosing to offer several providers — one that includes low-cost investments, and one that offers access to salary-based advisors (as opposed to commission based). Such a choice satisfies individuals who want access to representatives whose mission isn't sales, and those who want access to low-cost products. Finally, as an added bonus a quality 403(b) plan could be used as recruitment and retention tool.   Sources Model 403(b) Plan from Morningstar Model 403(b) Plan from IRS IRS Guide to New Regs New Regs Overview and Look at Hidden Fees Side-by-Side Comparison of Old and New Regs Changing 403(b) Plans for Changing Times K-12 Officials Face "Withering Onslaught" From Big Insurance Companies Plan Sponsors Guide to Retirement Plan Fees Lower Fees and Better Disclosure on the Horizon? Written Plan Requirement (free log in) Understanding Plan Costs and Revenues Paid to Your Providers     New 403(b)wise Discussion Board on New 403(b) Regs and Plan Improvement Post questions and get feedback on a new Discussion Board dedicated to improving vendor plans and transitioning to the new regulations. Find out what other employers have done and are doing. Posting to our Discussion Board is quick and simple, but does require a one-time registration process that is equally quick and simple (current Discussion Board registrees do not need to re-register).   To register: 1.  Click http://bwise.ibforums.com/ 2.  Click "Register" at the top middle of the board next to "Welcome Guest." 3.  Enter necessary information in the five fields (two of which are simply a repeat of your selected user name and email address). Once you've read through the "Terms of Service" agreement and click "I agree" you are done. 4.  An email validation will be sent to you. Click on the url link in that email and you are ready to post!     To post: 1.  Click "New 403(b) Regs and Improving Your Plan" 2.  Click "New Topic" 3.  And post your question.     Please note that the information you provide during registration will never be used for any purpose other than the Discussion Board.   Home | Disclaimer | © 2007-2008 Bwise Guys, LLC. All rights reserved.				For Employers Join scores of wise organizations who have purchased bulk orders of the essential retirement guide for teachers and school employees, Teach and Retire Rich. Email us with the number of copies you are interested in.