Forget 401(k) Plans, 403(b) Plans are in Worse Shape

People complain a lot about 401(k) plans. Some complaints are warranted, some like comparing 401(k) plans to a Ponzi scheme are a bit overdone. While most of my blog and articles tackle 401(k) plans, there is one group of plans that are actually in worse shape than 401(k) plans from a compliance and investment standpoint and that group is 403(b) plans.

403(b) plans are in a bit of a legal limbo since they may not be qualified plans or they may be qualified plans with many plan sponsors unaware that the plans may have inadvertently been covered by ERISA. First off, 403(b) plans are only available for employers that are public education organizations, some non-profit employers (only Internal Revenue Code 501(c)(3) organizations), cooperative hospital service organizations, and self-employed ministers.

Why are 403(b) plans in worse shape than 401(k) plans?

  1. The 403(b) market is still dominated by insurance companies with such huge fees, that they would make some of the more expensive 401(k) providers blush. Some 403(b) plans allow plan participant to choose multiple vendors, which becomes an administrative nightmare. In New York, the state teachers union was sued for endorsing an ING 403(b) plans that was high in fees and didn’t disclose the union’s endorsement fee.
  2. If the 403(b) is not an ERISA based 403(b) plan, there was actually no written plan requirement until 2009.
  3. There was a general fallacy that what made a 403(b) plans qualified under ERISA was only employer contributions. A 403(b) plan can become ERISA based just based on what administrative responsibilities than an employer takes in managing a 403(b) plan. So there may be many 403(b) plans that are ERISA based and don’t know it, who should have had a written plan document and filed Form 5500s since the plan was qualified, which can result in hundreds of thousands of dollars in penalties if caught by the Department of Labor. So there are many non-profit employers (governmental plans are not ERISA based) with huge compliance problems.
  4. While many financial advisors don’t understand 401(k) plans, fewer that that understand 403(b) plans. There have been too many financial advisors and third party administration (TPA) firms too interested in converting these plans into 401(k) plans without realizing some of the testing and reporting benefits that these 403(b) plans offer.

If you are a 403(b) plan sponsor or a financial advisor, I suggest speaking to an ERISA attorney who can describe some of the intricacies that make 403(b) plans such a potential mess.

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