As in all things 403(b), it seems, retirement rules of generally applicability take unusual twists when applied to 403(b)plans. This really all is still connected to the fact that the 403(b) lineage goes back to several generations of retirees,where they served as highly successful individual retirement arrangements. Today, we still have much to learn from the details of those pre-2007 plans (that is, prior to the fundamental changes brought in by the unnecessarily expansive 403(b) IRS regulations issued that year).

The DOL’s fiduciary rule is not saved from that same  problem. A close look reveals  interesting twists in the manner in which the rule affects  (or doesn’t at all!)  403(b) plans, which simply do not apply to other participant directed defined contribution plans. Two really are the most obvious:

Non-ERISA 403(b) plans.

Arguably, the plan participants most exposed to inappropriate product placement are those in public school plans.  Yet, these participants  are  excluded from much of the fiduciary rule’s protections, except where an adviser makes the recommendation to rollover those funds to an IRA. This is the same for state university 403(b) plans, as well as non-ERISA 403(b) plans for private tax exempt orgs-including “non-electing” church 403(b) plans (churches can elect to be covered by ERISA). Why? Because these plans  are not subject to ERISA, and 403(b) plans are excluded from Code Section 4975 (which is the prohibited transaction section under the Tax Code which makes the DOL rules apply to non-ERISA IRAs). This non-application really does have the potential to have a number of ancillary effects on those products, which constitute a significant percentage of the marketplace. I would also think it would serve as further incentive for the DOL to limit the application of the 403(b) “safe harbor” rules which are otherwise used to prevent ERISA’s application to certain 403(b) plans.

Individually controlled 403(b) contracts.

More complicated is establishing the manner in which the Fiduciary Rule and its related Best Interest Contract Exemption apply to the significant chunks of the 403(b) marketplace where the individual, not the plan, controls the plan investments, and where the participant is much more like an IRA investor.  One needs to closely detail the manner in which the terms of “ERISA Investors,”  “Retail Fiduciaries” and “Retirement Investors” apply, where the plan fiduciaries do not control the individual account investments. For example, financial service companies and advisors have relief when dealing Retirement Investors, but how does this really apply when the decision making authority is the 403(b) participant?

There are large numbers of “legacy” contracts, where there is no employer effectively involved in the 403(b) contract at all, though they are still technically part of the plan under ERISA.  Think of those contracts excluded by the plans under Rev Proc 2007-71 (and from reporting under the 5500 by the DOL). They are still technically covered by the Fiduciary Rule, and the BIC, but the employer has no relationship with the vendor (and often not even with  the participant).  Add to this the issue of distributed contracts, where the employer no longer has any involvement in the 403(b) contract, and the annuity contract is no longer being part of the ERISA plan.  Many of these type of contracts still generate compensation to those who advise on them.

One impact this is surely to have is to encourage employers to no longer permit contributions to these legacy contracts without substantial relationships with the vendor. As we work through to a better understanding, my guess there will be a number of interesting side effects on this market brought by these new rules.