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Guest Sierra

Revenue Ruling 90-24

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Guest Sierra

Effective in 2006 Revenue Ruling 90-24 will only permit tax-free transfers if the employer permits the employee to make on going contributions to the receiving 403(b) investment fund.

 

What will be the result of this modification? Will employers make a consious decision to add no-loads to their 403b platform or will it be business as usual with concerned ees clamoring for a no-load alternative to the commissioned based VA/mutual funds?

 

Peace and Hope,

Joel L. Frank

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Who came up with this one??? This seems to take leverage away from the consumer and does away with the "escape" clause!!! If I interpret what you said, this is very regressive.

 

So if one is in a bad 403b and that 403b is the exclusive 403b for salary reductions, then they are stuck in that one and cannot under any conditions (short of retirement), move their money?

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In my opinion and with the knowledge that few here will agree with me, it makes perfect sense. As long as the employer is liable for non-compliance, it should be able to control what vendors are available and the requirements to be an approved vendor.

 

I also would note that the new proposed regulations will require a plan document. Thus, it looks like the 403(b) is moving toward being an employer plan, as opposed to the hybrid it is now.

 

Mark Fischer, CFA

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Hi,

 

My motto is "follow the money" aka, "follow the lobbyists. " Who lobbied for this and how does it help the consumer? Thank you for any comments?

 

Gadfly

 

 

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The rumors I'm hearing are that these proposals came out of the Treasury Dept. per se, not out of the IRS. They are part of an ongoing and deliberate effort to make 403(b) plans more and more like 401(k) plans. This trend was visible starting with legislation going back into the late 1990s, was given a big boost by EGTRRA, and now a further one by the proposed regulations.

 

Who benefits, and who is behind it? As a general trend, the securities industry probably benefits most, and certainly they have been lobbying for most of these changes. The history of the 401(k) market is that it was originally dominated by the insurance industry, providing group annuities and guaranteed investment contracts, but before very long they were largely supplanted by the securities firms. Those firms were at first excluded by law from the 403(b) market, then once they were allowed in, they were limited by their own unwillingness to provide a lot of the features that had become standard in the market. Their strategy, for the most part, was pretty impressive: rather than go to the trouble and expense of trying to compete with the insurance companies who WERE providing all the features (compliance software, loans, help with distributions, etc.), the securities firms -- through ICI and SIA -- decided to simply, if gradually, get the 403(b) to no longer be distinguishable from 401(k). They are probably about halfway there already, and to the extent that this is successful, they will eventually be able to use all of their 401(k) administrative systems, marketing materials, product offerings, sample documents, etc. etc in the 403(b) marketplace, and potentially take it over. The proposal to get rid of 403(b) plans entirely in favor of "ERSAs" would be the ultimate step in that direction.

 

The insurance industry has, by the way, mostly played into their hands so far because they also benefited from a lot of the simplification in rules and from the higher benefit limits. I'm not sure how many of them are starting to regret it yet.

 

I do know that the NTSAA is opposed to these aspects of the proposed regulations. Although they are not permitted to lobby against it, their members are, and will. I'm not sure what NEA's position is, but they ought to be opposing it as well.

 

I do disagree with fischermh. The employer is NOT responsible for compliance when money is moved out of the plan. The IRS does not expect the employer to track what an employee does following a 90-24 transfer.

 

This is clearly a take-away for plan participants. It's not clear to me what is supposed to justify it.

 

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Guest Sierra

Once the new Regs are finalized the er will need to adopt a written plan...this by itself is a major improvement. The written plan will contain the investment platform. Because of this written document the er will be, in my judgement, a plan fiduciary for the first time in the history of salary reduction 403(b)s. The employer will have to take into consideration the relative costs of the various investments to be offered. The employer for the first time will understand what expense ratios are and act accordingly. Because no-load funds will be on the menu RR 90-24 in its current form will be unnecessary.

 

401(k)s may only be rolled over to another 401(k) when the ee becomes an employee of the new 401(k) Plan. This is what the IRS has in mind for the 403(b).

 

The days of the LAUSD offering 80 investment vendors each with its own multitude of investment funds is over.

 

Peace and Hope,

Joel

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I think Sierra is wrong. All that will happen is that we'll get the worst of the 401k plans with high costs and brokers. Why will the employer have to pay attention to the e.r.? This will be more prevalent in the small non-profit arena where there are few employees rather than the big school systems. This is the brokerage industry at work

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I think Yankowski is incorrect. One example, if a 90-24 transfer is done and then the participant takes a hardship distribution. If a bona fide hardship did not exist, the employer is liable.

 

Mark

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Guest Sierra

Suo: What would you like to see in the Regs that are not there?

 

The requirement for the establishment of a written plan will in my view be an invitation by the er to the unions to help design a good solid plan. So the design of the plan (as well as on-going monitoring) could well become a collectively bargained item. IN MY VIEW ONLY POSITIVE RESULTS ARE AHEAD OF US BECAUSE OF THE PROPOSED REGS.

 

Legally the ers will no longer be able to say that "we just send the money in"! This position will be no longer acceptable with or without ee involvement in plan design and monitoring.

 

Help is on the way,

Joel

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In principle, Mark is right about the employer's obligations continuing after the funds are transferred out of a product the employer has authorized, but in reality this is a pretty light obligation -- because most vendors will handle it, and because the IRS does not have a history of coming down on an employer for a violation that the employer did not even know about. Where employers are truly liable, when it comes to distributions, is if there is some evidence that they are systematically encouraging violations. As long as they leave it to the employee and the vendor, they should be OK (assuming we are still talking about a salary deferral only plan).

 

Joel may perhaps be right about the plan requirement resulting in a stronger fiduciary duty on the part of the employer. It seems unlikely, however, that this will be legally interpreted as an obligation to provide no-load funds. In fact, it could have the opposite effect, in that employers will be more worried about their legal obligations and will therefore choose to do business with full-service (i.e., more expensive) companies who will help them put a written plan in place and provide the necessary ongoing support. Furthermore, an increase in fiduciary responsibility makes it MORE likely that employers will require vendors to sign a Hold Harmless agreement, which the low-cost providers generally refuse to do. Now it may be that the low-cost vendors will beef up their support, but that means increasing their costs, which are bound to be passed along to investors.

 

In addition, there are plenty of reasons to do a 90-24 transfer other than to find a low-cost provider. Employees simply looking for the ability to put their money with a certain fund family, for instance, or those who are unhappy with their current vendor's service, will just be stuck. It's hard to see this as an improvement over the status quo.

 

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Guest Sierra

Yan...do you know of anyone effectuating a RR 90-24 transfer to a 403(b) loaded arrangement?

 

Joel

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Guest Sierra

Most ees would be more than willing to pay an additional 10-20 bp if it will cost that much for a properly run plan. And if the ers are unwilling to take on the legal responsibility then I invite them to exit the door and give the business over to their state run 457(b) Plan which every K-12 teacher in the 50 respective states have the right to participate in. IT'S TIME TO PUT UP OR SHUT UP!

 

Joel

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Sie,

 

I've told you before my name is not suo! You're real good about cutting and pasting so why don't you do it with my name?

 

Are you sure about teachers in all 50 states having the ability to invest in the state's 457(b)s? Teachers in our state sure aren't aware of this or how to do it.

 

I side with Yanikoski. If you look at the history of these things and what has happened in the past, the likelihood is that these things will go to the high cost vendor with the sales staff.

 

When you talk about the unions. Steve presented and the NEA went with the valuebuilder. My union takes the attitude look at how much money they give us to run the union.

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Guest Sierra

 

 

I've told you before my name is not suo! You're real good about cutting and pasting so why don't you do it with my name?

 

Are you sure about teachers in all 50 states having the ability to invest in the state's 457(b)s? Teachers in our state sure aren't aware of this or how to do it.

 

I side with Yanikoski. If you look at the history of these things and what has happened in the past, the likelihood is that these things will go to the high cost vendor with the sales staff.

 

When you talk about the unions. Steve presented and the NEA went with the valuebuilder. My union takes the attitude look at how much money they give us to run the union. <!--QuoteEnd--> <!--QuoteEEnd-->

Pardon me for using a shortcut to identify you, suoixonbo. You can use "Sie" as a shortcut for "Sierra" anytime. No need to get upset.

 

The current regs were adopted 40 years ago and the status quo is an outgrowth of those regs. THE FINANCIAL SERVICES INDUSTRY WAS QUITE DIFFERENT IN 1964 so the new regs will change the status quo...this is why the IRS has proposed them.

 

Moreover union endorsements will not have the weight that they currently have because each 403(b) employer will have to adopt a formal written plan. I feel this requirement lends great impetus for the various states to take over the 403b business. The various state Deferred Compensation 457(b) Plans is the ideal place for all of the local school districts to farm out the entire responsibility for 403(b) plans. Many states operate 401(k)s along side of the 457(b) so it is a natural progression for these Deferred Compensation Boards to operate a 403(b).

 

May I suggest you log onto your state's 457(b) website and determine if local public employers in your state can opt in. Please get back with your findings.

 

Peace,

Joel

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