Nonprofits, Education Brace For 403(b) Changes

July 20, 2008
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GRAND RAPIDS — New tax rules for nonprofit and education retirement plans go into effect on Jan. 1, and dozens of West Michigan school districts have banded together to meet the regulations.

The new regulations are the Internal Revenue Service’s biggest overhaul for 403(b) retirement plans in more than 40 years, said lawyer Susan Sherman, a partner at Miller Johnson Snell & Cummiskey and an employee benefits specialist. While the impact is minimal on participating employees, changes in the way the plans are administered are demanding attention from organizations, she said.

“Before, you could have a 403(b) with very limited employer involvement. That’s not the case any more,” Sherman said. “The regulations make it really clear employers are going to be held responsible for making sure plans are operated the way they are supposed to be. That is the big change.”

Under the new rules, 403(b) plans will be run more like 401(k) retirement plans in for-profit firms, she said.

Jim McLean, recently retired business manager for the KISD, said it made sense for school districts to tackle the regulations with a common approach.

“We are attacking the new regulations as a consortium rather than as individual districts,” said McLean, who is continuing to work on the 403(b) effort as a consultant. “The beauty of this is … we will probably be able to return to our program better than 2 percent per year additional earnings.”

That will come through the huge “economy of scale” and the ability to offer financial companies “$115 million per year in invested money,” he added. “That speaks much louder than an individual district that may be three-quarters of a million.”

Dozens of school districts in nine counties, including Kent, Ottawa and Muskegon, have joined the Michigan Retirement Investment Consortium, said Darcie Birkett, Ottawa Area Intermediate School District assistant superintendent of business services.

Under current 403(b) rules, the employer can allow any number of financial companies access to employees, and the two establish a relationship independent of the employer.

But with the new regulations demanding more accountability from employers, including a plan document that spells out details of the program, the education consortium intends to work with a limited number of vendors, McLean said.

“There are well over 100 firms now involved,” he said. “We plan to cut that down dramatically. Since the new regulations came out, a lot of vendors are pulling out of the marketplace anyway.”

Birkett said the consortium has hired a third-party administrator called TSA to oversee compliance with the new rules, she said. The next step is to select a registered investment advisor to review the many financial companies now serving school employees, she said. That adviser will examine the products, quality, history, fees, expenses and educational efforts and rank those firms.

“The basic plan is that from that laundry list, we will select the top three to five quality products, and those will become common vendors,” Birkett said.

In addition, the consortium will offer a no-frills product and will allow each district to add about three additional vendors of its choosing, she said, giving employees about nine investment company options.

McLean said the consortium also has developed a common plan document, which sets details such as which employees are eligible to participate and whether loans are allowed.

“We’re seeing what I just described happening all over the country,” Birkett added. 

Cory Clausing, chartered retirement planning counselor of Lincoln Financial, said his Southeast Grand Rapids office handles almost exclusively 403(b) plans.

“Our goal, whether they are existing clients or new clients, is to assess their particular 403(b) plan and find out what solutions we can provide to make sure that they’re compliant,” Clausing said. For example, the company could handle the additional record-keeping required under the regulations.

Sherman said the changes mostly affect smaller nonprofits that run 403(b) programs without employer contributions or outside the jurisdiction of the Employee Retirement Income Security Act.

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