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Final 403(b) Regulations

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JOEL L. FRANK

PO Box 148

Marlboro, NJ 07746-0148

(732) 536-9472

Fax: (732) 536-7373

Email: rollover@optonline.net

 

July 18, 2003

 

Re: Final section 403(b) Rules and Regulations

 

William Bortz

Associate Benefits Tax Counsel

Office of Benefits Tax Counsel

US Treasury Department

1500 Pennsylvania Avenue

Washington, DC 20220

 

Dear Mr. Bortz:

 

Revenue Rulings 67-361 and 67-387 (authority granted to PERS to operated a 403(b) plan) were issued at a time when section 403(b) permitted only one investment vehicle, the commercial annuity under section 403(b) 1. Under section 401(a) public employee retirement systems had been in the annuity business (fixed or variable) for many decades so the Service felt that these entities could well serve their participants in the 403(b) 1 annuity area. This was the rationale for the 1967 Rulings. The rationale ceased to exist when, as part of ERISA in 1974, the Congress added section 403(b) 7 to the Code authorizing mutual funds as an alternate funding medium making clear the Congressional intent for just two funding vehicles for 403(b) arrangements: a commercial annuity contract under section 403(b) 1 and a custodial account for investment in mutual funds under 403(b) 7.

 

Revenue Ruling 82-102 has one fundamental flaw that the final rules should address. It does not require, that in order for a public employer to continue to offer a PERS 403(b) plan it must also offer commercial annuities and mutual funds …the two statutory 403(b) funding vehicles. This is a reasonable requirement in light of the fact that the Rulings no longer permits a PERS to first start a 403(b) plan.

 

A case study is the Department of Education (DoE) of the City of New York. Even though the commercial annuity under 403(b) 1 was first made available to public school personnel in 1961 the DoE did not sponsor a 403(b) 1 annuity plan until 1970 when it designated its Teachers’ Retirement System of the City of New York as its sole 403(b) 1 annuity vendor. The DoE as employer, has never allowed the two statutory funding mediums: the commercial annuity and mutual funds to compete with the TRS 403(b) Plan. The TRS 403(b) Plan started in 1970 with two investment options: a fixed interest account and a variable annuity for investment in common stock. This common stock fund is now referred to as Variable A because in 1983 the legislature authorized a second variable annuity fund called Variable B. Variable B was to operate as a balanced fund. Rather than following its legislative directive and invest in “fixed income and equities securities” the Trustees for the past 20 years have managed the Variable B fund as a stable value fund. This investment policy decision has resulted in the Trustees being defendants in a multi-billion dollar class action lawsuit alleging (among other things) gross mismanagement of the assets of the Variable B fund.

 

Investment changes for future contributions may be made on a quarterly basis. The request has to be made at least 60 days in advance. Account balances may be transferred among the three investment funds no more rapidly than in monthly installments over a year. This request also must be made at least 60 days in advance. A request for a Revenue Ruling 90-24 transfer must also be made at least 60 days in advance. Unit values are calculated monthly. One would be hard pressed to find a more abusive 403(b) plan. The plan would be in clear violation of ERISA section 404© if not for the fact that PERS are exempt from the ERISA. These plan abuses never would have evolved if Revenue Ruling 82-102 required the inclusion of commercial annuities and mutual funds in the vendor list for 403(b) investing. This is what happens when there is no competition. If not for this abusive monopoly the TRS 403(b) Plan would have far less assets under management.

 

In my view the teachers and other public school personnel of the City of New York would be much better off if the TRS 403(b) plan was dissolved. Many have stopped contributing and have, thanks to Mayor Mike Bloomberg’s invitation, begun contributing to the Citywide Deferred Compensation Plans under sections 457(b) and 401(k). Rather than being forced to transfer their TRS 403(b) balances to a commercial annuity or mutual fund under Revenue Ruling 90-24 these teachers would much rather have the City of New York manage their retirement savings by transferring their balances to the 457(b)/401(k) plan that they currently contribute to. These transfers, however, are not allowed because Revenue Ruling 90-24 requires that a 403(b) arrangement may only be transferred to another 403(b) arrangement. It is imperative that the Final Regulations allow not only for the formal dissolution of a 403(b) plan but also to allow for transfers to 457(b)/401(k) plans under Revenue Ruling 90-24.

 

Should you have any questions or require clarification of these issues please do not hesitate to contact me.

 

 

Peace and Hope,

 

 

Joel L. Frank

 

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