From the December 2007 issue of Investment Advisor • Subscribe!

Grasping the New 403(b) Rules

Changes provide opportunities for advisors

While critics have said the new rules regarding 403(b) plans will pile on the paperwork, there are definite upsides to the pending changes, retirement experts say.

The new 403(b) regulations--which take effect January 1, 2009, and make 403(b)s work much like 401(k)s--will provide opportunities for advisors, plan sponsors, and participants, according to retirement experts at The Hartford. "With these new regulatory changes, this is going to be a turning point in the retirement market," Tom Foster, an ERISA attorney and national retirement plans expert for The Hartford Retirement Plans Group, told reporters on a recent conference call to discuss the 403(b) changes. The changes--the first in 40 years--will bring "potential consolidation and streamlining of providers and this should increase choice and resources for plan participants while new economies can potentially decrease administrative costs."

Those institutions that will be most affected by the modifications include the non-ERISA 403(b)s--which make up 77% of the 403(b) market--like public schools and universities; these non-ERISA plans haven't had to comply with ERISA compliance standards and also lack a plan document. ERISA 403(b) plans include charitable organizations like medical centers and nursing homes. The entire 403(b) market is sizable, with 30,000 plans and $650 billion in assets under plan management. "We're seeing double-digit growth in the 403(b) segment through the public schools and the charities, and looking at very closely crossing the one trillion dollar mark estimated as early as 2011," said Peter Moore, VP of sales for 403(b) retirement plans at The Hartford, on the conference call.

The non-ERISA market today is very fragmented, added Jamie Ohl, VP of products, pricing, and retention for the firm's Retirement Plans Group, who also participated in the conference call. The market is primarily participant driven, she pointed out, and "employers aren't as involved in the plans." Indeed, she continued, "the employees have individual 403(b) accounts and as a result, there's a lack of centralization in some cases, unlimited providers in these organizations offering participants investment opportunities often-times without the assistance of a financial professional."

The biggest change for employers will be to maintain a plan document--and this is where advisors have an opportunity to step in and help employers. "This is a fundamental shift away from the employee responsibility to an employer oversight and guidance through the plan and document," Moore said. "The employer is responsible for the contributions and distributions and the oversight of those from their plan."

An area that's caused some confusion is what's known in the 403(b) world as the 90-24 transfer. The transfers, as the industry knew them, were effectively abolished under the new rules as of September 24, 2007, Ohl said. "90-24 transfer really goes back to this idea of a 403(b) being an individual plan." Under the old rules, a participant in a 403(b) plan could move the money accumulated under his employer's program to another individual product offered by an insurance company or mutual fund, Ohl explained. Now, however, while an individual can still perform these individual transfers, it has to be done under what Treasury is calling an "information sharing agreement" in which employers have to approve the investment provider and product that the account is being transferred to. Since there are grey areas concerning the transfers, Treasury plans to issue clarifying guidance. "While the regs are effective in 2009, it covers plans dating back to September 24, 2007," says a Treasury spokesperson. "The clarifying guidance will be on the treatment of those transfers from September 24, 2007, to 2009 and then 2009 and afterwards."

A recent Cerulli report found that 62% of all advisors who work in the retirement plan arena have 403(b) assets, but their average AUM have been small--only $2.3 million. So the 403(b) rule changes present a golden opportunity for advisors.


Washington Bureau Chief Melanie Waddell can be reached at mwaddell@investmentadvisor.com.

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