This was modified 12/28 at 6:18 a.m.  

The IRS issued Revenue Ruling 2011-1, under which it will allow the combining of 403(b) assets with 401(a) assets in the 81-100 trusts.

Or maybe not. Take a look at the details, and it really doesn’t seem to be able to do much of what it says  can be done.  What it really is is another shining example of how complicated it is when Tax, Labor and SEC rules clash.
 
Here’s what I think the relevant pieces are and how they (don’t) fit together. It all becomes a problem for those 81-100 trusts which unitize their investments (as is typical), while 403(b)(7) plans are based upon the holding of the actual share as its ownership interest. Unitizing those shares creates all sorts of problems. Its not that 403(b)(7)s cannot hold units, its just that they have to be in the form of registered shares under the Investment Company Act of 1940:
 
• Under a 403(b) custody arrangement, the 403(b) plan participants have legal rights related to the underlying assets which don’t exist for the 401(a) participants outside of the employer stock arena. Unlike a 401(a) trust, a 403(b) custodial account is like an IRA account, in that it itself is NOT viewed as an investment vehicle needing to be registered under this ’40 Act . The custodial account holds registered shares and must still honor the 403(b) participant as the shareholder of the mutual fund share it holds on the participant’s behalf-meaning the reserving of the prospectus delivery, proxy voting and confirmation delivery (except as covered by the Schwab 10b-10 No-Act letter) rights under securities laws.  A 401(a) trust could act as such a 403(b) custodian as long as those interests in the underlying assets were honored.
 
• There are two kinds of 81-100 trusts:  common/collective trusts (maintained by certain regulated trust companies) for plans of unrelated employers; and master trusts for plans of an employer or related employers.
 
o They both provide unitization of their investments, but these types  of 81-100 trusts are typically not registered as investment companies under the Investment Company Act of 1940. This is generally because of the exemptions from registration for 401(a) plans, for non-401(a) church or governmental plans and their group trusts. If the collective trust is registered, it is not going to be a 81-100 trust (see below).
 
o However, there is no ’40 Act exemption for a non-governemental, non-church unitized group trust  which holds unitized 403(b) plan assets. This means that a 81-100 trust holding 403(b) assets may need to be registered as an investment company under the ’40 Act.
 
• For the common/collective trust, if it is registered (as sometimes they are, and thus usable by non-governmental/non-church 403(b) plans), it is not really a trust with comingled assets under 81-100. It is, instead, a registered investment company which sells its shares to plans. The shares of these trusts become the plan asset; the underlying trust assets are not plan assets.  403(b) plans and 401(a) plans are purchasing shares, not “collectively investing” in an investment which is unitized. It is therefore not really 81-100 (or needing to be so).
 
• For the single employer (or related employers) master trust arrangement
 
o Using an existing 401(a) master trust investment vehicle in which to combine and unitize 403(b) assets raises the question of whether or not that master trust loses its registration exemption. At a minimum, the language of that master trust vehicle would be required to pass through the shareholder rights to the 403(b) participant. Using the model language in Rev Rul 2011-1 won’t cut it by itself.
 
o No master trust is currently needed for 403(b) plans of related employers, as the custodial account is treated in the same manner as the IRA trust, as there should be (though who knows what is really happening in the market) no unitization of the investments.
 
So what does it all mean in the end?

 1.  Only public school/university and church 403(b) plans should be able to use a non-registered common/collective 81-100 trust with unitized interests to combine 401(a)/457(b) and 403(b) assets, but they should first check in with a security lawyer to make sure of it (or get a representation from the vendor). These trusts will need to recognize and pass through shareholder rights to the 403(b) plan participants in ways not available to the non-403(b) plans, which will be a challenge in a unitized arrangement. The IRS, as part of this ruling, appears to be recognizing that a holding a non-regisaterred unit in a 81-100 trust  qualifies under 403(b)  for the rule that a custodial account only holds registered investment company shares.

It doesn’t look like 403(b) plans of private (non-church) employers will be able to use this non-registered group trust absent an SEC No-Act letter. 

2.  For non-church, non-governmental plans, the unitized 81-100 trust may need to be registered as an investment company. But then it really isn’t a 81-100 trust. “Combining”  403(b) and 401(a) assets under this circumstance only means each plan buying the trust’s registered shares-which are reported as registered investment company shares on the Form 5500, not as a CCT. There would be no Form DFE for a CCT, either, on these units.
 
3. Using a 81-100 master trust for the single employer is not currently needed to combine 403(b) plans, as there should be no unitization going on. Using it to combine and unitize with 401(a) plans of the employer, however, may prove to be difficult. It has some security law risk and will require that 403(b) participants be “passed through” certain rights not available to 401(a) participants, and doing it in a unitized envirronement. This could be a nightmare to pull off. The same practical effect can be arrived much easier by using a single vendor for both the 401(a) and 403(b) plan.
 
What would be really nice is some sort of unequivocal statement from the SEC that including 403(b) assets in a 401(a) group trust doesn’t screw up the group trust’s exemption. But until then, we have to work these gyrations some how.
 
…But then there is still that nasty problem of the 403(b) plan assets not being able to use the 401(a) cash fund in the 81-100 trust, even if you are a public school or university that could even use one of these things. See my related blog on this matter.
 
 
 

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