With new regulations on the way, here are 13 suggestions for a creating a model 403(b) plan.
Section 403(b) was first added to the Internal Revenue Code (IRC) in 1958. In 1964, regulations were first issued that detailed some of the basic statutory provisions of section 403(b). The Internal Revenue Service is now in the process of finalizing new regulations to govern 403(b) plans. The best guess at present is that these regulations, the first in over 40 years, are to become effective Jan. 1, or shortly thereafter.
A Suggested Model 403(b) Plan
The new 403(b) regulations make clear that officials at school districts offering 403(b) plans will take on some fiduciary duties to plan participants and their beneficiaries. Smart (or even purely self-interested) officials should understand that by placing the interests of 403(b) plan participants first, they will gain the greatest fiduciary protection against lawsuits filed by the government and the plaintiffs' bar. (I know, I know, such officials are protected by governmental immunity laws, contractual indemnity clauses and insurance policies. Yet I don't know of anyone, including school officials, who likes to prepare for, and be subjected to, depositions and the other niceties of modern litigation.)
The truly wonderful thing about placing the interests of 403(b) plan participants first is that it also actually produces the best outcome for them. A "win-win" if there ever was one. To help ensure that outcome, though, school district officials must jettison the absurdities currently plaguing so many 403(b) plans. What follows, then, are some suggestions for creating a model 403(b) plan.
1. Get rid of the multi-provider model and adopt the single-provider model. The multi-provider 403(b) model, which is the most prevalent by far at school districts, allows teachers to choose their investment options from among more than one retirement plan services provider such as an insurance company or mutual fund company.
The multi-provider model can be confusing to teachers (or anyone else with a pulse) and often generates the "deer in the headlights" phenomenon: teachers have so many investment options they make no selections at all, or make them by throwing darts. This model has reached its logical absurdity in my state of California where, as a result of adoption of insurance code section 770.3, California teachers get to choose from (at last count) 123 providers - each of which has a glut of investment options.
The multi-provider model also balkanizes the 403(b) assets held by teachers into separate insurance contract accounts held at separate insurance companies. Schools districts with no fiduciary duties don't need to keep track of all that money so they have no incentive to try to get a low cost deal for teachers.
The single-provider model, on the other hand, allows school districts greater purchasing power, thereby resulting in lower and more transparent investment costs for teachers; this enhanced employee benefit gives districts a competitive edge in recruiting teachers. This model also offers a centralized way to provide plan documents, monitoring and reporting of participation rates, monitoring and reporting of participant contributions and withdrawals, a full range of investment options and customized and consistent communication materials, all of which help reduce the administrative burden at school districts.
2. Get rid of annuities and offer only mutual funds. Annuities and other insurance products have their place--just not in 403(b) plans (or 401(k) plans or 457(b) plans for that matter). I have, for the record, purchased lots of insurance products and believe fully in the idea of insurance. I just don't think such products should be on the menu of investment options in retirement plans. They are just too costly. I detailed in last month's column the fact that investment products offered by insurance companies in 403(b) plans cost between 200 and 500 basis points. In his testimony before a congressional committee in March, noted independent fiduciary Matt Hutcheson was less charitable in his estimate of 300-500 basis points. Given this, it just seems crazy for school districts to offer teachers investment options that have an added layer of fees. It's not that such options have no value at all; rather, it's that they do not have value enough to justify their (oftentimes) grossly higher costs.