How to Maximize an ERISA 403(b) Plan with Participant-Controlled Assets

I recently had a significant delay on a flight. My original flight was scheduled to take off prior to the onset of a major snowstorm. Unfortunately, the plane had some minor technical problems and we were forced to wait for the mechanics to fix it – all while the storm got closer and closer. Many people gave up and left, opting not to risk being stuck in the airport during the snowstorm. I decided to wait it out. When we finally left four hours late, what should’ve been a full plane now had plenty of room to stretch out. Perseverance has its benefits.

How does perseverance relate to 403(b) plans?

Ever since the final 403(b) regulations become effective in 2009, we’ve seen more and more non-governmental 403(b) plans being structured as ERISA plans. ERISA is protective, and provides an established framework to help run a responsible plan, and has been an obvious direction for many non-governmental 403(b) plan sponsors.

There is a complexity, though, in that many service providers issue 403(b) contracts where participants have control over the contract, regardless of the plan’s ERISA status. This may be appropriate in the non-ERISA environment, but it’s grossly inappropriate in ERISA plans where fiduciaries are supposed to control the plan assets.

Individual contracts are incompatible with ERISA plans for a few reasons:

  1. The plan fiduciary is supposed to select prudent investment options, monitor costs and have control of the assets—which they clearly do not with individual contracts.
  2. It’s much more difficult to move assets or change service providers with so many individual contracts, where fiduciaries have deemed it prudent to do so.
  3. There are many administrative challenges and expense to overcome with regards to legacy assets left with prior service providers when participants don’t act consistent with the fiduciary determination that a move is necessary.

What can you do if you’re dealing with an ERISA 403(b) plan with contracts controlled by participants?

The solution is complex, but taking the time to think through potential issues upfront can help longer term…

  • Start by educating employees. Focus on trust-building.
  • Be patient. It can take a long time for plan participants to understand their options and the benefit of transferring to a new service provider.
  • Find a service provider that can handle the legacy asset issues.
  • Make sure you are considering all the administrative issues.

Remember, like waiting for my plane, perseverance can pay off. Ultimately the majority of plan assets should move and the plan can be better structured, have fiduciary approved investment options, and ultimately be more efficiently priced with the plan assets under control.


In addition to blogging here, I also tweet regularly about topics of interest to Tax Exempt plans. 

 Affiliation Disclosures

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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