The confusion and multiplicity of plans may be where an Advisor with 401(k) experience can use the new determination letter procedure to benefit institutions – it may make combining or merging some plans easier, depending on the regulations.
Recently, the IRS stated that it will consider accepting determination letters from retirement plan sponsors of 403(b) plans starting in 2023. This relatively simple announcement could be good news for plan sponsors who run more than one type of plan and better news for financial advisors. This process may allow plan sponsors to streamline their processes around plans. Some of that streamlining may involve reducing the number of vendors who service their plans – for example, a non-profit health care provider may have both a 403(b) plan and have recently added a 401(k) plan for new hires. They may have different advisors assisting in each of those plans. Now, they may be able to have one vendor service both plans. For financial advisors that work with institutions and plan sponsors they may find the time to position themselves to be that single vendor.
In October of 2022, the IRS announced it would extend the same process, the so called “Determination Letter”,[1] that it uses to rule in advance on a 401(k) plan’s changes or termination to 403(b) plans. “These letters are essentially an insurance policy against IRS audits or legal flaws in the plan design because the sponsor can rely on previous IRS approval. It also permits a sponsor to catch an issue quickly by referring it to the IRS before they invest heavily in a flawed plan.”[2] In the past, only 403(b) plans that were preapproved could obtain a determination letter. Plans that were individually constructed or needed to alter their plan in a way that made a substantive change[3] away form from the preapproved one, could not obtain one.[4] That means additional work by an auditor and potentially less protection for the plan sponsors from suits by plan participants.
Until the IRS made substantive changes to the rules concerning 403(b) plans, many nonprofit and educational institutions were limited in the options they had over who could service those plans.[5] In the lifespan of benefits, ten years is not a long time. That may mean that some potential clients with 403(b) plans still rely on their vendors they used prior to the change in the regulations. Many financial advisors also shied away from working with 403(b) plans as regulations limited how financial advisors could charge those plans for their services.[6] The result for many participants in 403(b) plans is has been an unhappiness with the fee structure of those plans.[7] Advisors may also have politely declined to work with 403(b) plans based on their hydra-like structure. If you recall that mythical beast had many heads reaching from one body. Some institutions with 403(b) may have multiple, sometimes overlapping, plans. But the 403(b) market is so large, advisors may want to give it a second thought. According to the Government Accounting Office or GAO, “Total assets held by 403(b) plans … amounted to more than $1.1 trillion in 2020,…”[8]
The confusion and multiplicity of plans may be where an Advisor with 401(k) experience can use the new determination letter procedure to benefit institutions – it may make combining or merging some plans easier, depending on the regulations. Additionally, advisors with experience in helping educated investors in the nuances of annuities may find themselves in demand for clients with both 403(b) and 401(k) plans. That’s because 403(b) plans allow for more annuities than the current law allows for 401(k) plans,[9] though that is changing. Annuities are gaining more acceptance as a retirement investing tool for generations who need significant help catching up on retirement planning.
[1] https://www.natlawreview.com/article/should-i-be-getting-updated-irs-determination-letter
[2] https://www.plansponsor.com/403b-plans-may-apply-irs-determination-letters-starting-next-june
[5] https://padmin.com/blog/403b-plans-what-you-need-to-know-to-control-costs
[6] https://potomacfund.com/adding-aum-in-the-403b-space
[7] https://403bwise.org/education/bad-403b
[8] https://www.gao.gov/assets/gao-22-104439.pdf
[9] https://www.forbes.com/advisor/retirement/403b-vs-401k
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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