The traditional model 403(b) plan is in need of a revamp. Today, 403(b) plan participants have most of their retirement savings in individual annuity contracts or custodial accounts and most have individual relationships with advisers. Unfortunately, this leaves plan sponsors with an unreasonable number of retirement plan providers that are all serving the same plan, participant costs for investments are higher, and participants have too much responsibility for their investments.

Many believe that a full revamp is not needed, as plan sponsors should seek to strike a balance between the traditional model and new ideas to make the traditional model better. They recommend that plan sponsors should look at all options available to determine what is best for plan participants. Knowing all the options will help 403(b) plan sponsors make the right decisions for the participants investing in the plan.

One of the biggest issues with the traditional model is that 403(b) plan sponsors do not have fiduciary responsibility under the Employee Retirement Income Security Act. If there is any fiduciary responsibility for the plan sponsors, it comes from state statutes. In most states, specific legislation regarding these types of accounts does not assign fiduciary status to 403(b) plan sponsors.

Ellie Lowder, a consultant at TSA Consulting and Training Services, said in an interview with PlanSponsor, “One of my concerns has been that public school systems, overall, are small and rural and don’t have the staff to assume fiduciary obligations. If they know the truth of the matter, their preference is generally not to put themselves in a fiduciary position, which they can do by choosing investment choices or choosing a provider to ensure compliance.”

The 2007 revision to the Internal Revenue Service (IRS) regulations for 403(b) plans holds plan sponsors more accountable than before. This has caused a number of issues with plan sponsors using the traditional model and trying to balance the interests of participants with the interests of their employers. Most plan sponsors currently use third-party administrators (TPAs) that provide common remitter services and monitor compliance limits to make their jobs easier. .

If a 403(b) plan sponsor moves to a single provider, participants will still hold old annuities for which the employer is accountable. Annuities give participants retirement income at a guaranteed rate, provides a guarantee that heirs will receive death benefits, and provides protection against market volatility, making them very attractive to plan participants. Lowder said, “While many old providers will share information, it’s typically not a priority for those that have been deselected. This situation can create more issues for plan sponsors because they cannot force employees to move out of accounts with which they may be happy.”

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