The Seven “403(b) Administrative” Sins (Part 2)

This is my second of three blogs in a series I call the “Seven Administrative Sins,” which I know sounds a little ominous. Yet I’ve found it’s an effective way to point out the mistakes 403(b) plan sponsors make that can put a non-profit plan out of compliance – or turn it into an administrative monster.

In the first blog of this series, I talked about the problems regarding how many plans have provisions to force out small amounts, as well as the limitations regarding retirement plan loan limitations and the challenge of tracking them. In this blog, I will introduce two more “sins” that can plague 403(b) plan sponsors – and suggest a way to help them.

Sin #3: Hardship Distributions

This scenario is where a provider is granted a hardship distribution on an account balance, but the participant was allowed to continue making contributions to a different provider. Under the safe harbor rules for hardship distributions, employees’ normal contributions are supposed to be suspended after receipt of a hardship distribution. This insufficient coordination results in regulatory violations.

Sin #4: Qualified Domestic Relations Orders (QDROs)


We’ve also seen cases where Qualified Domestic Relations Orders (QDROs) are not properly implemented. A typical example is that a QDRO to the plan simply provides an asset split percentage to an alternative payee.  However, upon implementation, not all plan assets were taken into account, and one or more provider contracts with respect to that participant were missed. The inadequate QDRO procedures results in a plan violation, but more importantly, it’s a violation of a court order, and is patently unfair to the alternate payee.

Many plans still run into these types of administrative snags, despite the fact there has been a vast improvement in compliance among 403(b) plans since the effective date of the final regulations. The reason? In many cases, these sponsors have not traditionally had relationships with financial professionals to help them navigate the requirements.

This has been particularly true in plan education, where retail-oriented financial professionals have traditionally worked with individuals, but little to no plan sponsor level relationships existed. That absence of professional knowledge has put these arrangements at a disadvantage, thus the reason for the problems.

Where a financial professional can help

Financial professionals can help plan sponsors become more diligent to ensure all plan assets are taken into account in all plan processes.  Financial professionals are also aware of the challenges and can provide the expertise in implementing appropriate solutions, including the use of a third party administrator who are perfectly suited to track the assets and help with the appropriate compliance.

Stay tuned for the next “sins” in the series: plan investment contracts that don’t agree with the plan document – and contractual procedures don’t agree with plan provisions, as well as a lack of understanding of fiduciary duty.

Let’s chat in the comments.



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While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

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