Why the New 403(b)(2) Rules Are So Important to Plan Sponsors


By Lara Fuller

Originally slated to be effective beginning July 16, 2011, the new 403(b)(2) regulations regarding the disclosure of fees impacting certain retirement plans will now go into effect on January 1, 2012, according to an announcement by the Employee Benefit Security Administration (EBSA) on February 11, 2011. Regardless of the eventual effective date, these new disclosures will ultimately be very beneficial to the plan participants since they will force new and more detailed reporting requirements by the service providers to help plan sponsors meet their fiduciary responsibilities.

In summary, the new rules will require all service providers of defined contribution plans, defined benefit plans and ERISA 403(b) plans to disclose a detailed overview of the services to be provided, declare if they will be acting as a fiduciary of the plan, disclose all compensation to be paid in a consistent manner and whether any potential conflicts of interest exist. So how does this affect a company as a plan sponsor?

As mentioned, the plan sponsor is usually named as a plan fiduciary. As a fiduciary of the plan, the plan sponsor is to act solely in the interest of the plan participants and beneficiaries. Under these new rules, there are a couple of specific things that plan sponsors need to do to ensure that they are meeting their responsibilities.

  1. They must be sure they receive a written agreement from each service provider. If they do not receive a written agreement, they are obligated to request the agreement from the provider. If they still do not receive the agreement, they must report this to the Department of Labor within 30 days of the day the provider declines to issue such agreement or within 90 days from the original request if no response is received from the provider.
  2. They must evaluate all providers to ensure that the agreement is reasonable. An agreement is considered reasonable if the services are necessary and the compensation is reasonable. Some things to consider when evaluating the reasonableness of the fees are:
    1. Identify and quantify fee structure
    2. Compare fees to other plans similar in size
    3. Compare per-participant costs to industry averages

Failure to follow the above rules and procedures could result in a prohibited transaction for the plan or could be considered a breach of fiduciary duty to the plan participants, opening the plan sponsor up to possible litigation and liability. At the end of the day, these new rules are meant to help plan sponsors more easily meet their responsibilities. Understand the new rules, take advantage of them and protect both yourself and your plan participants.

For further information, please contact Lara Fuller.

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