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. It 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.

A complex solution

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 building trust.
  • Be patient. It can take a long time for plan participants to understand their options and the benefits 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.

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.

Friedman is the tax-exempt national practice leader with the Principal Financial Group.  A version of this blog originally ran on The Principal blog. Follow Aaron on Twitter @1AaronFriedman1.

Insurance products and plan administrative services are provided by Principal Life Insurance Company. Securities are offered through Princor® Financial Services Corporation, 1-800-547-7754, Member SIPC and/or independent broker dealers.  Securities sold by a Princor Registered Representative are offered through Princor. Princor and Principal Life are members of the Principal Financial Group® (The Principal®), Des Moines, IA 50392. © 2015 Principal Financial Services, Inc.

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