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Wither Low-cost 403(b) Investments In K-12?

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Fisher:

 

Its not admin/IT issues that will reduce the number of 403b providers in the K-12 market place but the lack of adequate revenue for the amount of effort required to maintain such plans. The core market for the major 403b providers will continue to be the college and non profit employers where 403b/money purchase plans are the employer's retirement plan in which both the employer and employees are required to make contributions which provide a continuous amount of revenue. Employee voluntary contributions are an add on but are not a make or break for major providers who along with many second tier providers will bail out of the K-12 voluntary 403b market by 1/1/09 using the 403b regs as a way to make a graceful exit.

 

As a separate matter you are naive to say the least, to think that SD can afford to pay an employee to perform the services that you have listed as necessary to adminster the plan or that the employee will have the skill set necessary to perform such services without putting the SD at risk for mistakes.

 

An ancillary problem for the k-12 403b providers is that there is competition for voluntary employee contributions from 457b plans and IRAs which for most people will provide all of the contributions (4/5K) that they can save for retirement. In addition, unlike most 403b plans, Roth IRA contributions are available for all eligible employees. 457b plans are not a viable option in the NP market because such plans can only be offerred to highly comped employees.

 

You are also ignoring the anxiety of the Public School adminstrators, who because of their accountability for taxpayer money, are adverse to any possible liability risk arising from a fringe benefit plan that is not part of the education function of the School district or required under a collective bargaining agreement. Therefore SD officals will insist on indemnification from all providers for any liability arising out of administering of such plans regardless of whether there is any existing precedent under state law. Some providers will refuse to sign information sharing agreements with the SD or plan administrator because of the requirement that all providers share in any indemnificaton to the SD even if the provider is not at fault for the mistake.

 

The fact that SDs are not subject to ERISA does not mean they are exempt from fiduciary liability under state law for mistakes made in administering a 403b plan. The same issues of fiduciary liability of a 401k plan adminstrator under ERISA present in the LaRue case recently argued before the US Supreme Court could apply to a fiduciary under state law. The question is who would be the fiduciary under a SD 403b plan. This uncertainty is another reason to require indemnificaton from the providers under the 403b plan.

 

The question of liability of the SD for mistakes made in administering a 403b plan is separate from the state law question of whether the 403b regs make the SD a fiduciary for investments offered under the plan.

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I have posted what I think to be the pertinant sections of a recent Department of Field Bulletin from July 2007 regarding SD/Employer liabilites...at least as the DOL apparently sees them.

 

I think that there is the perception of employer/SD liability based on the below statement, at least for certain aspects of administration and due diligence. Whether this liability can be outsourced or assumed by a third party I do not know, but I would encourage SD/Employers to at least review Fiduciary Standards for 401ks as a starting point...In my experience it is mostly careful thought and detail process that upholds fiduciary standards and at the end of the day, that sort of attention, even if not required specifically by law, would be in the best interests of the employees and teachers participating in salary deferrals.

 

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The safe harbor at § 2510.3-2(f) states that a program for the purchase of annuity contracts or custodial accounts in accordance with provisions set forth in section 403(b) of the Code and funded solely through salary reduction agreements or agreements to forego an increase in salary, are not “established or maintained” by an employer under section 3(2) of the Act, and, therefore, are not employee pension benefit plans subject to Title I, provided that certain factors are present. These factors are: (1) that participation of employees is completely voluntary, (2) that all rights under the annuity contract or custodial account are enforceable solely by the employee or beneficiary of such employee, or by an authorized representative of such employee or beneficiary, (3) that the involvement of the employer is limited to certain optional specified activities, and (4) that the employer receive no direct or indirect consideration or compensation in cash or otherwise other than reasonable reimbursement to cover expenses properly and actually incurred in performing the employer's duties pursuant to the salary reduction agreements. In this latter regard, if an employer, or a person acting in the interest of an employer, receives, for example, other consideration from an annuity contractor, the employer could be deemed to have “established or maintained” a plan.

 

The safe harbor allows the employer to engage in a range of activities to facilitate the operation of the program. The employer may permit annuity contractors—including agents or brokers who offer annuity contracts or make available custodial accounts—to publicize their products, may request information concerning proposed funding media, products, or annuity contractors, and may compile such information to facilitate review and analysis by the employees. The employer may enter into salary reduction agreements and collect annuity or custodial account considerations required by the agreements, remit them to annuity contractors, and maintain records of such collections. The employer may hold one or more group annuity contracts in the employer’s name covering its employees and exercise rights as representative of its employees under the contract, at least with respect to amendments of the contract. The employer may also limit funding media or products available to employees, or annuity contractors who may approach the employees, to a number and selection designed to afford employees a reasonable choice in light of all relevant circumstances.(2)

 

The Department of the Treasury/Internal Revenue Service has issued final regulations at 26 C.F.R. 1.403(b)-0 et seq. (July 2007) reflecting legislative changes made to § 403(b) since the existing regulations were adopted in 1964. The § 403(b) regulations also incorporate interpretive positions that the Department of the Treasury/Internal Revenue Service have taken in other guidance on § 403(b). This Bulletin is intended to provide guidance to EBSA’s national and regional offices concerning the extent to which compliance with the updated regulations would cause employers to exceed the limitations on employer involvement permitted under the Department of Labor’s safe harbor for tax-sheltered annuity programs at 29 C.F.R. § 2510.3-2(f).

 

Analysis

 

The new § 403(b) regulations have not led the Department of Labor to change its view on the principles that apply in determining whether any given TSA program is covered by Title I of ERISA. Even though the differences between the tax rules for TSA programs and those governing other ERISA-covered pension plans may have diminished, the Department's safe harbor regulation at 29 C.F.R. § 2510.3-2(f) remains operative. The new § 403(b) regulations allow significant flexibility regarding the employer's functions in the structure and operation of the arrangement. Thus, compliance with the new § 403(b) regulations will not necessarily cause a TSA program to become covered by Title I of ERISA.

 

The Department has acknowledged that employers have an interest separate from acting as their employees’ authorized representatives in ensuring that the annuity contracts and custodial accounts in TSA programs are tax compliant. The Code’s qualification requirements impose obligations directly on employers in connection with the employees’ annuity contracts and custodial accounts. If individual contracts or accounts fail to satisfy the tax qualification requirements, even if due to actions or errors of an employee or annuity contractor, the employer can be liable to the IRS for potentially substantial penalty taxes, correction fees, and employment taxes on employee salary deferrals. Accordingly, in the Department’s view, the safe harbor at section 2510.3-2(f) subsumes certain employer activities designed to ensure that a TSA program continues to be tax compliant under section 403(b) of the Code.

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...in my state (WA) we have the 457 option in addition to the 403(b) option and at the current time one can invest to the limit in EACH, permitting a huge amount to be put away...

 

So the folks in my state will continue to have the 457; the Wisconsin deal sounds like a winner and that info should somehow be disseminated EVERYWHERE! Additionally, a state-wide system sounds like a fine option, if some good no-load options were made available...

 

More good news: Better-Investing, which is the national organization with educational emphasis that supports individual and club investors has developed a nascent relationship with the NEA. And the NEA is recently more open to the idea of "educating educators" re: investing, I have heard. Could it be that NEA members or people here on this site are having an effect? Or could it be because there is pressure from the outside from other sources such as -- Oh, I don't know -- (drumroll, please) a lawsuit or something?

 

Judy Schneider

 

 

Since I live in Washington state, I can also see the 457 plan (Deferred Compensation Program) as an out, if my district makes a bad choice as to 403b vendors. I am still pressuring the local union leadership and administration to get a committee up and running to research and recommend. Unfortunately, even I am not exactly sure what we need to do as far as a RequestForProposal for vendors and/or search for a ThirdPartyAdministrator. I worry that the admins involved will write it so that no low-cost vendor wants to accept our business! I have personally written emails to both TC and Vanguard customer service dept. asking what they can offer us, for available funds or for plan administration, have not gotten replies from either.

 

As per the news about NEA and Better Investing, that is a good step. What a great idea, to offer real investor education, instead of sales pitches posing as retirement information seminars. The current Security Benefits ripoff (NEA Valuebuilder) is terrible, and their new lower cost option is only tolerably better. Why should we pay them an extra .5%-1% to get the Vanguard or Fidelity fund, instead of just buying it directly?

 

Gordon

 

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Looking for some help.... My wife and I have a 403b annuity with Western Reserve Life. I have recently moved our portfolios from the variable market to a fixed market. We are going through a financial hardship and are in need of surrendering our contracts for the surrender value. However, WRL tells us that IRS rules (law) prevents us from doing so. If thats the case, then why a surrender value? Isn't the point of a surrender value the followg: You surrender the contract in exchange for the surrender value... not the account value...?

 

We are in a tight spot right now and this is an option we have really given a lot of thought towards... We understand the possible tax consequences ... I even read the IRS 571 rule governing 403b distrubutions... It clearly states we can take a distribution based on a hardship... However, it makes no mention of a surrender....

 

Can someone please give us some sound information regarding our situation?

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