The Modernization of 403(b) Plans
plan sponsors and participants who can take advantage of updated retirement plans in light of the first new regulations in decades. One reason is the final regulations that the Internal Revenue Service (IRS) issued on July 26, 2007, which provide updated guidance on several administrative requirements. The rules are designed to modernize 403(b) plans so that they are more similar to 401(k) plans, introducing a new level of fiduciary responsibility even to plans that are not subject to the Employee Retirement Income Security Act (ERISA). The new rules are expected to pack a powerful punch when combined with the landmark Pension Protection Act of 2006 (PPA), which has been described as the 21st-century ERISA. Add to that regulatory mix the continued influence of the 401(k), a growing appetite for bundled services and the downsizing trend across America, and industry observers cannot help but conclude that a new day is dawning for 403(b) plans. It is inevitable that private-sector practices such as total retirement outsourcing will seep into not-for-profit plan design and oversight. (See sidebar for highlights of survey findings that compare health care-sector and corporatesector plans.) For example, consider benefit managers who have made the leap from Fortune 500 companies to the nonprofit sector; their presence likely will bring more discipline to the feenegotiation process because they are accustomed to observing fiduciary oversight at a much deeper level. Sponsors of 403(b) plans and plan participants will benefit from greater fee disclosure and ultimately lower fees. Total retirement outsourcing also yields other advantages to plan sponsors, such as reduced time spent on vendor management, access to up-to-date regulatory information, access to state-of-the-art technology, ease of data management and reduced need for internal staffing. Participants benefit from the convenience of accessing all accounts via one call center or Web site and of consolidated communications, which provide a more holistic view of their retirement picture. The public’s fascination with mutual funds, coupled with plan sponsors’ longstanding quest
Defined Benefit Plan Freezes: Who's Affected, How Much, and Replacing Lost Accruals
This paper quantifies how workers are likely to be affected by pension freezes, and how much they would have to save in a 401(k) plan - whether provided by their employer and/or saved by themselves - to offset the loss of accrued benefits from the pension freeze. The analysis notes that how an individual worker might be affected by a pension freeze varies widely, based on the unique nature of each pension plan and the terms of each plan that is frozen; the variation in workers' age, and tenure; and future investment results. The analysis presents its findings in terms of additional compensation (in a 401(k) plan, whether provided by an employer or worker) needed to cover the accruals lost to a pension freeze. In some cases, the pension plan sponsor offsets the pension freeze by increasing its match in the workers' 401(k) plan, but each case is different, and in some cases the lost pension benefit is not replaced.
Defined Contribution Plan Dominance Grows Across Sectors and Employer Sizes, While Mega Defined Benefit Plans Remain Strong: Where We are and Where We are Going
This Issue Brief discusses employment-based defined benefit (DB) and defined contribution (DC) pension plans. The number and percentage of individuals participating in private DC plans is increasing relative to the number and percentage participating in DB plans. The total number of participants in all DB plans was 33 million in 1975. Participation increased to 40 million in 1983, and has remained in the 39 million-41 million range since that time. The total number of participants in defined contribution plans increased from 12 million in 1975 to 44 million in 1993. * Between 1985 and 1993, the net change in the number of primary DB plans was generally greater for plans with fewer active participants. The number of DB plans with 10-24 active participants decreased 55 percent between 1985 and 1993, while the number of DB plans with 500-999 active participants decreased 22 percent. Because most of the decline in primary DB plans occurred in plans with two to nine participants, the decline in the number of employees covered by a primary DB plan was relatively small.* Research results suggest that, at least for single-employer private retirement plans with at least 100 participants, employers' contributions to DC plans have increased relative to DB plans significantly more than could be explained by employment shifts since 1985. After controlling for the impact of firm size, unionization, and industry composition, the percentage of total contributions devoted to DC plans increased 11 percentage points between 1985 and 1993. While this is an aggregate measure that does not control for the differential impact of various governmental constraints on plan sponsors (e.g., the full-funding limit modifications in 1987), it does provide insight into the degree to which retirement benefits are being financed in increasing measure through the DC approach. A significant portion of this movement may be attributed to DC plans with the 401(k) feature.* Despite the many changes in government regulation regarding DB plans and the increased prevalence of DC plans, DB plans are still an important part of both the private and public retirement systems. The data in this report show that they are firmly entrenched in large companies and in plans covered by collective bargaining agreements. It is unlikely that many of these plans will be shifted - at least completely - to defined contribution plans.* During the 1980s and the first half of the 1990s, despite increasing regulatory complexity and cost, reduction in marginal tax rates, increased minimum required contributions for underfunded plans, and tighter maximum contribution limits, large private employers continued to offer DB plans. Policy enacted in the future could provide incentives to encourage sponsorship of DB plans and/or DC plans, or it could discourage plan sponsorship.