403b "converted"to 401(k) plan?

[Guest stashu]

I have experience with 401(K) plans but have been asked to look at a (long-existing) 403 (b) plan by a not-for-profit hospital. I am surprised by the differences and would appreciate some advice/direction...... and at first blush wonder if it's possible/advisable to change this to a 401 (k) --- here's why: They have nearly one hundred investment options with an average fund charge of 125bp. The "advisors" are salesman taking 50bp

of compensation ---- and who supposidely need to be on-premise once a month 12 months a year to communicate these funds to employees. Some employees re-balance MONTHLY with the "help" of these people. Only 15 of the funds in this grouping meet my minimal criteria of 5-year Lipper "B" performance.

I am used to conducting employee education meetings (or overseeing them for the plan sponsor) in the DB and 401 (k) arena and have zero experience with 403 b so I am reacting to this by wondering if a 401 (k) option on a conversion is even possible-------- any thoughts? This is my first time using this site. Stashu

[Guest LVanSteeter]

I don't know if a 'conversion' is possible. However, there may be options:

1-Get the 403(b) plan to another company. Most of the large mutual fund companies offer record keeping services that would offer much better value.

2-Terminate the 403(b) and start a 401(a)/401(k) IF the sponsor is eligible. The issue here is that a & k plans have much greater reporting requirements. Again, I would look for another vendor to record keep or trustee.

Good Luck

[Guest stashu]

I don't know if a 'conversion' is possible. However, there may be options:

1-Get the 403(b) plan to another company. Most of the large mutual fund companies offer record keeping services that would offer much better value.

2-Terminate the 403(b) and start a 401(a)/401(k) IF the sponsor is eligible. The issue here is that a & k plans have much greater reporting requirements. Again, I would look for another vendor to record keep or trustee.

Good Luck

Thanks----------- I need to determine the qualified plan rules on this regarding termination.

[Locust]

I think your issues are the expenses and the advisors. Good luck on getting the hospital administrators to do anything about it. Problems you might find: 1. the advisors are getting paid a lot and may have used their compensation to develop personal relationships with the administrators - in the worst case scenario you may find that the administrators are receiving benefits from the relationship such as golf, and "seminar" outings, and in the worst worst case you may find that the advisors are relatives or close friends of the administrators; 2. under the current arrangement, the advisors are taking care of everything from enrollment to payment, and this is not something the hospital will want to mess with because it adds to its responsibilities; 3. the advisors control all the data - does the hospital even have an accounting of the assets; and 4. can you imagine the mess and cost of trying to move the money from a hundred funds, many of which probably have back end loads, to a few reasonable funds and consolidated administration? Who would pay for that?

[Guest willow]

Also, keep in mind that with a 403(b) you do not need to run the ADP test. So the HCE's can contribute what they want.

Years ago, I saw 403(b)'s migrate over to 401(k)'s and suddenly HCE's were getting refunds. They were not happy.

Also, is the plan set-up on a group level or is it individual annuities? If it is individual annuities, there is a good chance there will be back-end charges to leave and the decision to leave will be a participant decision not a organizational decision. What this means is you may essentially have a start-up plan if you wish to move to a different provider

Obviously, without knowing more, it is impossible to give any true guidance.

Happy New Year.

Regards,

willow

[Guest mjb]

There are other differences between the plans. A 403(b) plan can be exempt from ERISA if it only provides for salary reduction contributions or file an abbreviated 5500 if there are employer contributions. All 401k plans must file a complete 5500. A 403b plan does not receive an IRS determination letter and does not have any formal termination process because the assets are owned by the participants. As noted there is no ADP testing in a 403b plan which allows all HCEs to contribute 15k. Also employees with more than 15 yrs of service can contribute an additional 3k for up to 5 years which means that over 50 ees can put away 23k in 2006, far more than HCEs could put away in a 401k plan subject to the ADP test. Eliminating the 403b plan will not endear you to the HCEs or the hospital's administrators. A 403b plan is not aggregated with any qualified plan mantained by the hospital but contributions to a 401k plan have to aggegated with a qualified DC plan. The hospital could sponsor a separate 457 plan for the top hat employees which would allow an additional deferral of 15k per yr.

Your biggest problem will be limiting the number of vendors who can sell their annuity products to participants and then provide for recordkeeping and plan adm services which has been avoided since the hospital is not acting as the plan admin (which leads me to believe this is a non ERISA plan). Only way to provide plan admin/recordkeeping services will be to charge participant's accounts at a cost of $50-100 per yr. The hospital will have to prepare a 403b plan document and SPD and select investments if the plan is subject to ERISA.

Your best option is to create a new 403(b) plan using a reputable 403(b) vendor to perform plan adm/recordkeeping services for all contributions as of a future date and then allow employees to transfer their balances from the 403b annuities under the current plan at their discretion since the employees own the accounts and cant be forced to transfer their account balances to the new plan.

If you proceed with centralized admin you will find some surprises such as employee loans that exceed 50k or deferrals in excess of the 402g limits which could cause some tax problems for employees and the employer.