Limiting funding vehicles

[Guest AEA]

We consult on a plan that is trying to get the number of annuity providers and investment brokers under control (down from nearly 100 to 1). A number of brokers are now complaining, claiming that the employees have 403(B) plans of their own (outside of the plan document sponsored by the employer) that they should be able to place with whatever broker or company they wish. The employer sponsors the only 403(B) plan that I am aware of and I am wondering whether it is possible for employees to start 403(B) plans of their own. In addition, is it not possible for the employer to limit the provider to one which will offer multiple (meaning 15-20) fund options?

I can find no legal support for an employee to make salary reduction deferrals to his or her own 403(B) plan. The plan is non-ERISA and I can find no legal restriction on how many annuity providers the plan can have. Would appreciate any input.

[Guest TBit]

A 403(B) plan is an employer sponsored plan (See IRS Pub. 571). The employer can, at any time, make revisions to the requirements for investment companies. It is possible that with making these revisions that certain companies may not want to remain an approved vendor within the plan.

[MWeddell]

There is a DOL regulation that delineates what is clearly a non-ERISA 403(B) (because it is not provided by the employer) from what is very likely a ERISA 403(B) plan. That regulation sets forth the rationale that may be used by the employer to restrict the number of providers ("annuity issuers"). I have a hard time reading that regulation and being able to tell a client that it can narrow it down to just 1 provider and still be confident that it has a non-ERISA 403(B) provider. However, I know of one attorney who disagrees with me and the regulation does not clearly say "non-ERISA 403(B) plans must have > 1 provider." You'll have to read the regulation for yourself.

Remember there are three types of 403(B) plans: those subject to ERISA, those not subject to ERISA, and those that the employer believes are not subject to ERISA but really are. Don't let your client fall into the third category!

A non-ERISA 403(B) plan should not have a written plan document. That alone may make your client's plan subject to ERISA.

The employer would have to be conducting payroll withholding for any 403(B) deferrals, so there's no way that there are 403(B) arrangements that are unknown to the employer's payroll department.

Sounds to me like the providers are grasping at straws here to protect their existing contribution inflows.

[Guest AEA]

Thanks for the input - this is a non-ERISA plan that will only become ERISA if it elects to have ERISA apply, in other words, a church plan.

[MWeddell]

Thanks. That clears up some of the confusing.

[Carol V. Calhoun]

One thing to watch out for here is that legislative history indicates that church retirement income income accounts described in 403(B)(9) are subject to exclusive benefit rules. I understand that there is some question as to whether any 403(B) plan run by a church might be held to be a 403(B)(9) plan. Exclusive benefit rules have in other contexts been held to impose fiduciary standards. Thus, if you allow only one provider, you would want to make sure that there had been adequate due diligence to make sure that the choice of that provider was an appropriate choice, bearing in mind both risk and reward, from a fiduciary perspective.

As for the idea of employees having their own 403(B) plans, they cannot establish such plans on their own (independent of an employer). They might have 403(B) plan from another concurrent or past employer, but a 403(B) plan requires employer involvement.

[Guest Tom Geer]

I break these down into three groups. First are 403(B) arrangements that are not plans at all, which is what the DOL regulation is about. Second are plans within the DOL regulation that are not subject to ERISA (or, at least, most of ERISA), which includes a non-electing church plan. Third, are plans fully subject to ERISA, including electing church plans.

As a church, you can choose which one of the three categories to fall into. You can also use any or all of three different funding vehicles, annuities, mutual funds in custodial accounts and retirement income accounts. Fiduciary duties on a non-ERISA retirement income account would be set without the benefits and detriments of ERISA rules, unless you create an electing plan. Particularly in the area of investment selections within an array, ERISA 404© provides meaningful, although complex and annoying, guidance on what steps the plan needs to take to restrict fiduciary duties, and you ought to at least think about making an election. Complying with 404© would also give you a pretty decent way to get rid of the less popular and/oror less appropriate vehicles now in place.