The Seven “403(b) Administrative” Sins – The Final Chapter

I’d like to thank you for indulging me as I take one last dramatic turn in my blog series featuring the “Seven Administrative Sins.” In each blog, I’ve uncovered the errors 403(b) plan sponsors make (many times unknowingly) that can doom their plans – either from a compliance perspective or through administrative adversity.

To get up to speed, you can read the first blog of this series, where I talked about how problems arise when many plans have provisions to force out small amounts, as well as the limitations regarding retirement plan loan limitations. In the second blog, I introduced two more “sins” – hardship distributions and Qualified Domestic Relations Orders (QDROs).

At the Principal Financial Group®, we typically see these type of problems crop up when a 403(b) plan sponsor who is shopping for a new service provider comes to us in search of a professional to guide them. Which brings me to the last chapter – the final three (and possibly the most pervasive) sins a plan sponsor can make.

Sin #5: Plan investment contracts that don’t agree with the plan document 

This is one problem we see regularly.  403(b) regulations clearly define that the plan document governs.  The new prototype program also makes clear that prototype 403(b) and volume submitter 403(b) documents are only valid if the plan governs in the case where provisions differ in the investment contract.  Sometimes contractual provisions are required under state insurance law that may not agree exactly with the plan.  Those are generally not a concern.  If there is any question, plan sponsors need to be prepared to ask the question.

A typical example of where it is a problem is when a plan does not allow loans, but an investment contract does. Since the plan governs, there should be no loans; however, the service provider of the contract may grant a loan since it’s allowed under the contract.  This poses a compliance problem for the plan.

Sin #6:  Contractual procedures that don’t agree with plan provisions

In reference to the loan example for Sin 5, a plan may allow for a loan, and investment contracts allow for a loan –but the plan only allows for one loan, and the contracts do not implement procedures to check if the participant already has an outstanding loan with another service provider’s contract.  When a subsequent loan is granted, the terms of the plan have been violated. This is an operational compliance error; however, it may be a bigger issue if the participant causing the violation is highly compensated. It then becomes a discrimination issue as well.

Sin #7: A lack of understanding of fiduciary duty

I view this as a big, and quite possibly the most prevalent problem for 403(b) plan sponsors today –and it’s usually the reason why fiduciaries fail to adequately carry out their duties.  Plan fiduciaries need to understand they are responsible for due diligence on ALL plan assets. That includes discontinued contracts. There is apparently a misunderstanding with regard to some of the Department of Labor’s lenience on Form 5500 reporting and disclosure with regard to certain contracts. None of that guidance excuses the fiduciary from their duty to ensure that plan assets are and remain prudent, and that all plan assets are taken into account in due diligence processes.

Still time for plan redemption

To combat these sins that may plague your 403(b) plan, I’m calling on plan sponsors to reach out to financial professionals to help get their plans properly positioned so that fewer errors are made in the future.  Financial professionals are aware of these types of challenges and can provide the expertise in implementing appropriate strategies. They can also enlist the help of a third party administrator, who is perfectly suited to track the assets and help with the appropriate compliance.

In other words, maybe it’s not too late for retirement plan redemption.

Let’s chat in the comments.


In addition to blogging here, I also tweet regularly about topics of interest to Tax Exempt plans. Follow me on Twitter: @1aaronfriedman1.

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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.

Insurance products and plan administrative services are provided by Principal Life Insurance Company, a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.

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