After nearly three years of hearing about the “proposed” changes to the IRS’s 403(b) rules, the deadline is sneaking upon us very quickly. Are you and your district holding out, waiting for the perfect solution to this problem to be delivered to your door? I would caution you to not wait much longer as this might be a much longer process for your district then you are expecting.
With the new regulations taking effect January 1, 2009, now is the time to be sure your district has a plan to become compliant with the new regulations. We have all been inundated with literature including sample plan documents, exchange agreements, and even offers to run our 403(b) programs for free. How does a district sort all of this information out to be sure to do the right thing for the district and all of their employees?
One of the requirements of the new regulations is that a district must have a plan document in place. If your inbox is anything like mine, you have probably been collecting plan documents like I collected baseball cards as a kid, by the dozen. How do you know which document is right for you and your district? Unfortunately, there is no one perfect document for all districts. The IRS has released a sample plan document that districts may utilize. However, we have determined that the initial IRS sample document doesn’t even meet all the needs of our district. For example, it doesn’t even address board paid annuities. Can one of these free plan documents be right for your district? As with any district plan it is probably in your best interest to have legal counsel review any program you plan to put in place. There are school attorney firms in Michigan that have already made plan documents available in very affordable packages to districts. Some of these IRS-approved documents provide important components, such as indemnification agreements, that act in the best interest of the district as opposed to the interests of the vendor that provided the free plan documents. They can provide you with sample vendor letters, agent agreements, vendor agreements, universal availability agreements, and even solicitation guidelines.
There are several group plans and consortiums that are springing up all across the state to help districts deal with the impending requirement changes. One of the major changes in the code is the plan record keeping requirement that will be placed on districts. A consideration that districts must make going forward is whether they have the capacity to track employee contributions, withdrawals, transfers, loans, and other transactions from now until eternity. This capacity will require time, technology, legal liability, and especially expense. This is the major reason that many districts are organizing and turning to Third Party Administrators (TPA) to help meet the requirements. TPA services can range from record keeping and single source remitting of all 403(b) deposits to employee education on the fees associated with various investment options.
Many of our current investment vendors offer TPA services as an “arm” of their business. If a district is interested in TPA services, it is important for the district to decide if it wants to use a completely independent TPA or a full service company. The consideration would address the independence of information and any advice a TPA firm might provide if it was also acting as an investment vendor on your approved list. You need to ask the question, “Are these services free?” You will get widely varying answers on this question. Some of the full service companies have touted their solution as free, as long as they are an approved vendor. Some independent TPAs have suggested passing any costs onto employees, sales agents, or even the vendors. Whatever your approach becomes, be sure to do your due diligence on the firm you choose and have ALL fees disclosed…we all know nothing is truly “for free.”
Hopefully, these regulation changes will have a positive effect on the world of 403(b) investing. The changes will provide our employees and us with valuable investment information on fees along with investment return information that likely was not provided in an organized and useful format. It may allow your district the opportunity to shorten your list of approved vendors/agents down to a list that have a genuine interest in the district and your employees. It may also provide an opportunity to streamline some payroll processes in your office by utilizing new services such as single remitter of contributions or by offering employees the opportunity to make automatic changes to contributions online.