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403b Plan Investments


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is it allowed to have a 403b Plan with no Participant investment direction?

the contributions would all go into an account managed by an RIA and the TPA would produce individual statements.

It is a 403b7 plan and management would be restricted to mutual funds only.

Thank you

CBW

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It is an abomination to have participant directed accounts. It is the expectation of ERISA that the investments be managed by a fiduciary (and its advisers). Since 403(b) plans come from the retail insurance rip-off tradition, it may seem strange that some protection and responsibility have emerged into the light.

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So you are saying "yes, it is ok?" I found a couple of things that make me think it is ok but they are not explicit enough for me to understand and be comfortable stating it is so. PLR 200242047 (understand can't rely), Rev Rul 2011-1, RR 2014-24.

Thanks

(Every week when I go to the grocery store I ask myself, "Which of these shoppers would I want to manage my retirement savings?" But it's great that they have to manage their own.)

CBW

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A 403(b) plan need not have participant investment direction. You're not finding authority on it only because 403(b) sets forth all the requirements, and doesn't include that one. So you're not going to get cases or authorities on the issue of whether it's required, because there is simply no basis for requiring it.

That being said, there are two limitations. First, in a nongovernmental, nonchurch plan, there is an exemption from ERISA that applies only if certain conditions are met. See 29 C.F.R. Ā§2510.3-2(f). Among the conditions for that exemption are that employer involvement in investment decisions must be limited to "limiting the funding media or products available to employees, or the annuity contractors who may approach employees, to a number and selection which is designed to afford employees a reasonable choice in light of all relevant circumstances." So if there is no participant investment direction, the ERISA exemption would not be available to a nongovernmental, nonchurch plan.

Second, if the employer makes all the investment decisions, it may have greater potential for fiduciary duty than if participants choose their own investments.

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Thanks very much.

Not afraid of ERISA coverage - there will be company contributions.

Your second point is, I believe, one of the great travesties perpetrated on the american worker in the recent times.

CBW

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Let me just play Devil's advocate for a moment.

Suppose I perform design of solar powered widgets for the destitute. I do it well, and have a few good employees who also do it well. The Board of our non-profit corporation would like to reward them by contributing to a retirement plan on their behalf.

I'm not sure I agree that the employer, who doesn't want to be saddled with investment performance responsibility, and lacks investment expertise just like all or most of the employees, is evil just because they make the employees responsible for their own investment choices. Why should I accept the liability, and the responsibility?

In the non-403(b) world, do you think any employer who sponsors a SEP or a SIMPLE-IRA is perpetrating an abomination, since the employee selects the IRA? I'd sure rather have investment choice and have a plan than I would to have my employer choose not to sponsor a plan because they don't want investment liability.

I realize the original post is re a 403(b) plan, but it seems to me the issues are the same.

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so there is no plan and the owner keeps the money? what does he do with it? invest it with an advisor maybe? A ha!

also, I have trouble accepting the premise that the employer "lacks investment expertise just like all or most of the employees"

And there are reasons for separate accounts, but its all just fun and games.

CBW

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Ignorance about investment liability is part of the problem. Employers take the apparent easy way out from a very small potential liability with great adverse consequences to most of the employees. I would use a military word that begins with "chicken" and has four more letters to describe the lack of effort and interest of most employers to properly assess the options and potential liability before making decisions about how plan assets will be managed. And most advisers to the employers are equally culpable.

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Ignorance about investment liability is part of the problem. Employers take the apparent easy way out from a very small potential liability with great adverse consequences to most of the employees. I would use a military word that begins with "chicken" and has four more letters to describe the lack of effort and interest of most employers to properly assess the options and potential liability before making decisions about how plan assets will be managed. And most advisers to the employers are equally culpable.

I agree with what your saying, but there's more to it. There seems to be an incredibly large number of employees who demand the right to mange their own accounts despite their lack of training and/or ability to do so appropriately.

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That is a very deep point, worthy of a lot more discussion. But I am not willing to put in the effort beyond a rant toward a lost cause. I will leave it that I applaud a plan (including a 403(b) plan) that is willing to consider doing the right thing by managing the assets. I note that a 403(b) plan is constrained in its choices for investments, so it has fewer tools for optimizing professional management compared to a 401(a) plan.

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