403(b) Plans are loosing Investment Options in 2009
As a result of a government regulation that becomes effective next year, many employers who sponsor 403(b) plans will likely reduce the number of providers and investment choices in their plans, as well as put in place restrictions on loans and hardship withdrawals.
That could be a headache for the workers at many hospitals, schools and nonprofit organizations affected by the new Internal Revenue Service regulation.
To be fair, the new IRS rule, the first of its kind in 40 years, is designed to make 403(b) plans look more like 401(k) plans. Up until now, 403(b) plan participants had in some ways much better deals than those with 401(k) plans: They could invest their money with many different vendors and they could take out loans and withdrawals without having to go through their employer.
But now the world of 403(b) plans is changing. To be in compliance with the new IRS regulations, 403(b) plan sponsors need to have several documents and agreements in place just like employers who sponsor 401(k) plans. Employers will need a written document that provides a summary of its 403(b) plan and identifies the approved list of vendors, eligibility rules, contribution limits, loan rules and limits, and distribution and withdrawal rules, among other things.
Some financial advisers say employers may not have the expertise in place to create such documents. Still, many existing 403(b) providers, including TIAA-CREF, the nation's largest 403(b) plan provider, are giving employers model plan documents to use.
Employers also need recordkeeping and information-sharing agreements in place with their 403(b) vendors. As part of their new fiduciary responsibilities, employers must keep track of their workers' money inside the 403(b) plan. With the information-sharing agreement, employers will be assured that vendors are sharing information among themselves about participants' hardship withdrawals, loans, and transfers.
But some 403(b) firms are not able or willing to meet the terms of the information-sharing agreements that employers plan to use. And that could result in some 403(b) providers exiting the business or reducing their presence, leaving workers to re-arrange their contributions into different funds and products. Thousands of workers may loose their choices as a result.
Fewer low-cost options?
Employers don't have the time, expertise or money to implement the new regulations, employees face the possibility of losing low-cost and no-load investment options in their plans, and the vendors are spending a lot of money trying to interface with district and third-party administration's information-sharing systems.
Given all the turmoil and confusion, employers and associations are pelting the government with requests to delay the effective date. The IRS may announce its plan early next month and many are hopeful they will get relief. But no matter whether the new regulation goes into effect Jan. 1 or some later date, many 403(b) plan participants will ultimately have to make some decisions about their retirement plan.
What should 403(b) plan participants do when the time comes?
1. Pay attention
Participants in 403(b) plans should pay close attention to the new 'approved vendor' list and look for a low-cost vendor. In all likelihood there will not be one," he said. "If there is not, sometimes the high-cost vendors have a [low-cost] product that they don't like to talk about, but will offer if asked."
2. Switch only if necessary
Though many third-party administrators (TPAs) will suggest otherwise, 403(b) plan participants don't have to transfer their existing balances to a new provider. If, however, a plan participant does decide to move their assets [for the right reasons], it has to be to a newly approved vendor."
3. Be wary of high-pressure sales tactics
Those TPAs that are just "product sales organizations in disguise may give compliance services for free to employers in exchange for access to the employees to sell their high-cost, high-commissioned products. These TPA's should be avoided by (school) districts.
4. Make your voice heard
Plan participants should be active in helping the employer make the right decision, but should be careful that they don't end up promoting a union product that is expensive.
5. Do your research
If you really would like to be thorough, search the web for more information, or if you are really bored, visit the IRS' 403(b) site which contains the regulation.
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