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ACLI Backs 403(b) Vesting

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The American Council of Life Insurers says the proposed 403(b) plan prototype program should make room for employers to include vesting schedules.

The Internal Revenue Service recently proposed streamlining the process that schools and other nonprofit employers use to set up 403(b) retirement plans, by permitting vendors to create prototype plans.

The ACLI, Washington, is welcoming the announcement of the prototype program.

“This program has the potential to be a great help to plan sponsors in keeping their plans compliant,” ACLI retirement security specialists — Walter Welsh, James Szostek and Shannon Salinas — write in a comment letter.

But the ACLI retirement specialists say one major omission is lack of a mechanism for employers that want to have employees qualify for benefits over a specified period of time, and another concern is language that appears to give employers unilateral authority to change the plan terms.

Many employers require retirement plan members to “vest,” or stay in the plan a minimum number of years, before they qualify for full benefits. One ACLI member companies reported that 54% of the 403(b) plan sponsors it serves have vesting schedules, and another member company said 60% of all private, not-for-profit 403(b) plans governed by the Employee Retirement Income Security Act have a vesting schedule, the ACLI retirement specialists write.

“The inability to include a vesting schedule would greatly decrease the usefulness and applicability of this program,” the retirement specialists warn.

The specialists also recommend that the prototype plan program should coordinate the provisions of the plan document and the contract, rather than having the plan document terms override the contract in every case.

The proposed requirement that a prototype plan preempt any conflicting provisions of the contract or custodial account could permit the employer to change the underlying annuity contract simply by amending the plan document, the specialists write.

If the current language were to stay as is, issuers could not be confident that their contracts would determine the full extent of their obligations, the specialists write.