IRS OKs changes to 403 (b) Plans

from www.yahoo.com


By EILEEN ALT POWELL, AP Business Writer Wed Aug 22, 7:30 PM ET
NEW YORK - Teachers, health care professionals, museum curators and others who work for nonprofit employers will soon see changes in their retirement plans. The Internal Revenue Service in July approved the first major overhaul of the 403(b) plans in more than four decades, with the aim of giving employers more oversight of the savings programs.
"It's pretty clear that the government has done a lot to accomplish its stated goal in the regulations of moving 403(b) arrangements more closely to the qualified plan model," attorney Mark E. Griffin of the Davis & Harman LLP law firm in Washington, D.C. told a recent conference. That means that after the changes are fully implemented by January 2009, the 403(b) plans will look a lot more like the 401(k) plans for workers in private industry.
Both of the retirement plans take their names from sections of the tax code and both allow workers to set aside pretax money that grows tax-deferred until it's withdrawn in retirement. This year the contribution limit is $15,500 for most workers, with an additional $5,000 for those 50 and older. In some cases, nonprofit employers offer matching contributions as private companies do.
Balances in the accounts have grown significantly as Americans have been encouraged to save more for their retirement.
Workers in the nonprofit sector currently have about $680 billion in their accounts, while balances in 401(k)s are nearly $2.7 trillion, according to the Investment Company Institute, a Washington-based trade association.
Much of the 403(b) money traditionally has been invested in fixed and variable annuities, which are contracts sold by insurance companies that are designed to provide payments at specific intervals in retirement. A growing number of large institutions such as hospitals and colleges have been making mutual funds more available to their workers in recent years.
Evan Giller, general counsel for institutional client services with the TIAA-CREF retirement company in New York, said the biggest change for many nonprofit employers is that they'll have to develop a written plan document by Jan. 1, 2009, rather than relying on the insurance companies' annuity contracts or mutual fund custodial account documents.
"This is important from the consumer's point of view," he said. "It's not just the fact of having a plan document but the regulations put emphasis — and responsibility — on the employer to make sure the provisions of that plan document are enforced."
Giller said the IRS was concerned that in the past, there often was little oversight of workers who took loans from their plans or made hardship withdrawals, sometimes without regard to limits or penalties.
A number of companies like TIAA-CREF are preparing to help nonprofit employers deal with plan documents and other new record-keeping requirements, including insurers such as the Lincoln Financial Group and American International Group Inc. as well as the Fidelity and Vanguard fund companies.
Another change, which will occur this fall, involves transfers. In the past, savers could move their 403(b) assets among annuity or custodial accounts without penalty. Many workers used this to shift their money into lower-cost mutual funds.
Starting Sept. 25, such transfers will be allowed only to companies that have signed agreements with the employer.
Dan Otter, a former teacher who operates the educational Web site http://www.403bwise.com, believes this will hurt some savers.
He said many 403(b) savers currently have "terrible choices of investments at work," with some offering only annuities with high fees and surrender charges. The current transfer system has allowed some of these savers to put their money instead into mutual funds or other low-cost investments, giving them a higher yield.
"A lot of people are angry they're going to lose this option," he said. "They could lose their escape clause."
On the other hand, Otter endorses the provision in the new rules on so-called universal availability, which requires companies to make sure retirement savings opportunities are offered to more workers, including visiting professors and some other employees who were excluded in the past.
"People will have to be told annually of eligibility," Otter said. "Now a lot of employees aren't told, like secretaries and drivers. They overhear things or find out only accidentally that they can participate."