As 403(b) plan sponsors continue to understand and apply new regulations, meet expectations in their roles as fiduciaries and seek assistance with some very tough decisions, the comparison between 403(b) and 401(k) plans generally takes place.  Spending time pondering this question is not a waste of time.  However, there is NO blanket statement declaring either plan type is better than the other for every plan sponsor.  Facts and circumstances must be identified and considered before starting up a new plan or terminating a plan possibly with the intent to set up a different type of plan.

Expenses related to plan documentation, investment products and administrative services are usually the first items to hit the list for consideration on what plan is best suited for the plan sponsor. Weighing the cost is certainly an appropriate approach.  But don’t end up paying the piper because you failed to consider potential limitations with your new plan design… 

 

 A few things to consider and explore before heading down the path toward a 403(b) plan termination are:  

  1. Have you identified all the contracts that the IRS considers "issued as part of the employer plan"?  Once this is done…
  2. Determine if the written plan allows for plan termination.
  3. Have you included representation from the Union, if applicable.  
  4. Harmonize the variety of investment contracts with the written plan by making sure all the characteristics within the investment contracts are not in conflict with the written plan.  
  5. Determine feasibility and potential for success of  timely investment liquidation.
  6. Create a time line of events with participant level education and communication.  

This list is not intended to be all inclusive of what needs to be done to terminate your plan.  It does begin to paint the picture for the types of activities that should be considered.  The main idea is KNOW your plan well before taking the steps to terminate.  

If you are considering a 403(b) plan termination because it was explained to you that a 401(k) plan is less complicated, consider the following prior to taking the steps to terminate the 403(b) plan:  

  1. What is the potential for loss of assets during the plan termination of the prior plan?  Participant’s will be given the option to take a distribution vs. a rollover of assets into the new plan.  
  2. What impact does the actual loss of assets have on the pricing of your new investment contracts? 
  3. Explore and understand the required modifications to internal HR and Payroll processes with the new plan design.  Do you currently have the necessary resources, knowledge and capacity for additional "in house" functionality?  
  4. What type, amount and frequency of data will be expected from you? 
  5. Your 403(b) did not require an Average Deferral Test (ADP).  However, your new 401(k) plan will require this non-discrimination test for salary deferral.  This could increase administrative cost.  

Again, this list is certainly not inclusive of all things to consider, but where you may "pay the piper" when you least expect it, is when introducing a 401(k) plan with an ADP test, if the non-highly compensated employees (NHCEs) are not contributing at a level that allows the highly compensated employees (HCEs) to maximize their salary deferrals, then the 401(K) plan may be less complicated, but much less effective for saving retirement funds.  

It is very important to consider cost of administration and regulatory guidance that has matured and appears to be less complicated, but I encourage you to take a broad look at the before and after prior to making the decision to terminate your 403(b) plan with the intent to set up a 401(k) plan.  At times, it will make perfect sense, but there have been times when the "piper" got paid.