Organizational responsibility 403b, 403b7, 401k

[Guest Lily R]

I work for a very small 501c3. We currently have a typical 403b plan with high expenses. I want to use the occasion of rewriting our plan document (due to GUST) to change to a vendor with lower fees. I am considering changing vendors (to TIAA-CREF) or changing plans to a 403b7 with Vanguard or even a 401K with someone else.

We usually have between 9 and 11 people on staff and between 7 and 10 participating in the plan at any one time. Of these participants, 4 are long-term employees, in their late 40's to mid-50's, who earn relatively high salaries. The remainder of the staff is much younger (often in mid- to late-20's), lower paid, and usually leave the organization within one or two years of beginning participation in the plan.

The organization contributes a fixed percentage of salary and we allow elective deferrals up to the legal limit.

We outsource the preparation of our 5500 and plan document.

I am unclear about how these three different options will affect my organizations responsibilities. We have in-house resources to keep track of employer vs. employee contributions, but not for record keeping or education beyond that. Are the three options significantly different in terms of organizational responsibility for a plan of our size and configuration?

[Carol V. Calhoun]

In the case of a private (nongovernmental, nonchurch) 501©(3) organization, a 457(B) plan must be limited to a select group of highly compensated employees. Thus, if you wish to cover all employees, you would have to use either a 403(B) or a 401(k) plan. (You could, however, use a 457(B) plan in addition to a 403(B) or 401(k) plan to allow for higher deferrals by management or highly compensated employees.)

The two major advantages of a 403(B) plan, in the case of your organization, would be (a) employees could move the existing money into the new contracts, rather than having to have separate plans for old and new money, and (B) a 403(B) plan is not subject to "actual deferral percentage" (ADP) testing. ADP testing in effect limits the contributions of highly compensated employees to a 401(k) plan based on the percentage of compensation that lower-paid employees choose to contribute. While there is a safe harbor that allows a 401(k) plan that has employer contributions to avoid ADP testing if certain requirements are met, it is more easily avoided by just using a 403(B) plan.

A 401(k) plan would typically be used only by a larger organization, which had more than one type of employer involved, e.g., a 501©(3) university with a 501©(4) HMO, or by an organization in which a substantial number of employees had balances in 401(a) plans of prior employers that they wanted to be able to roll over. (And even that second advantage will go away in 2002, when rollovers among various types of plans will become permissible.)

You can click here for a chart with more extensive information about choosing among 401(k), 403(B), and 457(B) plans.