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  1. 10 MYTHS About the 403(b) Regulations SAVING : INVESTING : PLANNING Gregg Libutti September 25, 2008

  2. Myth # 1 • The new requirement of a written plan significantly escalates an employer’s responsibility for the plan. • Employer responsibility for the plan is not new • Consistent with IRS message since start of IRS audits in the mid- ’90s • Roles of written plan • Accountability: require employer to take ownership of the plan • Formality: superimpose a more defined structure on the plan

  3. Myths # 2 and 3 • A school district must have a single centralized plan document, and must file that document with the IRS for approval. • Both parts of that statement are incorrect • Regulations do not require a single plan document: though they encourage it • Can use a collection of documents • No requirement to file with the IRS: though new opportunity for IRS reliance in recent guidance

  4. Myth # 2 and 3 (cont’d) • IRS model plan language; ASBO sample document • Public schools can rely to the extent of adoption • Reliance limited to satisfaction of form requirement: not operation • Not required to adopt entire document: reliance limited to parts adopted • Some of the model language not well suited to many school districts • Examples: automatic enrollment; absence of Roth contributions, employer contributions • Can modify or add to the document: counsel and providers can assist • ASBO and PASBO worked together to create sample document • Incorporates most of IRS model language: about 80% - 90% • Adds a helpful adoption agreement: checklist of options • Always consult counsel

  5. Myth #4 • All investment products in the plan must have identical provisions • An employer can make that decision, but it is not a requirement under the regulations • Products can have different features as long as they do not violate the 403(b) requirements • Confusion may stem from analogy to 401(k) plans

  6. Myth #5 • The employer now needs to handle everything on a day-to-day basis including approving loans and hardships. • Key focus of regulations: employer taking more ownership and control: does not mean that they have to do everything • Historically: most plan duties were delegated • Reason for “hold harmless” or “service provider” agreements” • Employer can decide • Extent of delegation • To whom delegated • Regulations formalize what was and still can be delegated

  7. Myth #6 • The final 403(b) regulations require school districts to review the investment products in the plan • Important to distinguish between • Whether a product complies with 403(b) requirements (required) • The merits of a particular product (not required) • Districts may want to review the products for other reasons • Bottom line: there is nothing in the regulations that the district determine if one product is better than another

  8. Myth #7 • All public school districts now have fiduciary liability for their 403(b) plans. • Employer’s clearly have responsibility for ensuring plan compliance: in form and operation • Whether they also have “fiduciary duties” is a separate question • Title I of ERISA does not apply to public schools • 403(b) regulations themselves do not impose fiduciary liability: IRS has informally confirmed in numerous presentations

  9. Myth #8 • An employer can narrow down to one or two vendors and ignore any vendor that was in the plan yesterday but will not be in it tomorrow. • Employer can designate the number of providers, subject to any state legal restrictions; however, • The plan will need to include the following buckets of accounts • Any account of current employee that receives a contribution after 2004 but no contributions after 2008 (i.e., deselected provider) • Any account of current or former employee, or beneficiary, that receives a contribution after 2008 • Any account of a current or former employee which receives a transfer/exchange after September 24, 2007

  10. Myth #8 (cont’d) • Reasonable good faith standard for the first bucket (contributions to provider stopped after 2004 but before 2009): • If employer attempts to incorporate deselected provider into the plan’s compliance procedures, employer not responsible if provider refuses • Also possible for provider to reach out to employer • Not an option for employer to spurn or ignore these accounts

  11. Myth #9 • If an employer does not want to adopt the 403(b) regulations, it can just terminate the plan. • It is true that the final regulations add a new provision permitting plan terminations; however, • Must adopt the regulations before the plan can be terminated • If not done before 2009: must have written plan before terminating • Must distribute all assets under the plan • Employer may not have authority to force distribution • Distribution of annuity contract itself can satisfy • No similar example for custodial accounts, and employer may not have authority to force cash-out

  12. Myth #10 • Every 403(b) plan sponsor can just replace the 403(b) plan with a 401(k) plan or a 457(b) plan and have less responsibilities than under the 403(b) regulations. • There is no universal answer for all employers. The answers are likely to be specific to the employer, based upon their objectives. • For starters: unless the 403(b) plan is terminated (see Myth #9), the new requirements will still apply to the frozen plan. • Also: both 401(k) and 457(b) plans already impose many of the same requirements now being added to 403(b) plans. Thus, what is the gain? • Some additional questions: • Is the alternate plan type available to the plan sponsor? Example: new 401(k) plans not available to public employers • How are the rules and features of each plan different, and are those differences important?

  13. THANK YOU The information in this presentation is general in nature and may be subject to change. Neither AIG Retirement nor its financial advisors give legal or tax advice. Applicable laws and regulations are complex and subject to change. For legal or tax advice concerning your situation, consult your attorney or tax advisor.