Presented Thursday, May 7, 2015, at 2:30 p.m.

1. 403(B) PLANS
CHARTING THE WATERS OF
RETIREMENT PLAN REGULATION
MAY 7, 2015
Lori Z. Wright, CEBS, CMS
Richmond

2. MERCER
Today’s Discussion
• What did 403(b) arrangements look like before the final 403(b) and other recent
regulations?
• What was the purpose of the new regulations?
• What actions did plan sponsors have to take to comply?
• What do 403(b) plans look like today?
• What challenges do 403(b) plan sponsors still face?
• What’s next for 403(b) plans and plan sponsors?
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3. MERCER
403(b) Arrangements Before Recent Regulations
• What did typical 403(b) arrangements look like before the regulations?
– Many were treated as non-ERISA plans; ERISA plans, for the most part, still
operated more like their non-ERISA cousins than their 401(k) counterparts
– Many utilized multiple, competing service providers offering annuity and/or
mutual fund products
– Plan sponsors had little interaction with vendors beyond providing a
participant listing and contribution amounts each payroll
– Most utilized bundled investment vehicles, often limited to proprietary funds
– Pricing was inefficient, comparable to using retail funds
– Plan fees were hidden within investment expenses, revenue sharing, and
annuity charges
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4. MERCER
Final 403(b) Regulations – Why?
• What was the purpose of the regulations?
– Increase oversight over 403(b) plans
- Regulatory oversight by IRS
- Plan sponsor oversight
– Eliminate reliance on employee self-certification
- Require plan sponsor or designee to make plan decisions for loans,
hardships, in-service distributions, etc.
– Bring 403(b) plans closer in operation to 401(k) plans
- Specific plan sponsor responsibilities
- Increased IRS oversight and involvement
- Increased informational requirements (Form 5500, plan audits)
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5. MERCER
Regulatory Compliance
• What actions did plan sponsors have to take to comply with the regulations?
– Formal plan document requirement effective January 1, 2009
­ All plans, including non­ERISA plans
– Full Form 5500 and plan audits (for plans with more than 100 participants)
­ First year was 2009 plan year
­ Significant challenges for sponsors and auditors
– Vendor coordination and data sharing
­ Which vendors are required to share data?
­ What if the vendor won’t or can’t share data as required?
­ Who is responsible for the coordination?
– Changes in eligible employees
­ Eliminated some excludable categories
­ New focus on compliance with universal availability rules
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6. MERCER
Continued Challenges
• What challenges do 403(b) plan sponsors still face?
– Data coordination between multiple active or active and legacy vendors
­ Master administrator, data coordinator, or internal data coordination
­ Use of SPARK data format
­ Non­sharing vendors
– Vendor consolidation
­ Still a challenge in 403(b) environment
­ Participant and sponsor loyalties
­ Inability for sponsor to move assets unilaterally
­ Termination charges and restrictions
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7. MERCER
Continued Challenges
• What challenges do 403(b) plan sponsors still face?
– Form 5500s and audits
­ Many plans had limited scope audits and may not have included all
applicable assets in 2009 reporting
– Governance and oversight
­ Plan sponsors slowly increasing regular fiduciary oversight by
­ Forming oversight committees
­ Developing committee charters
­ Holding regular committee meetings
­ Performing due diligence activities (vendor review or selection,
investment monitoring, fee review)
­ Still lagging 401(k) plan levels, but increasing
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8. MERCER
Exercise due diligence over all
service providers and investments
Maintain charter to identify
responsibilities and processes
Identify specific committee or
subcommittee with responsibility
over investments
Establish measurable
performance guarantees that
put fees at risk for non-
performance
Operate under “prudent man” rule
Select or retain vendor(s)
through regular competitive
evaluation process to
determine reasonableness of
fees and services
Meet regularly and document
Committee actions and decision-
making process
Key Committee actions Vendor oversight Investment oversight
Monitor vendor(s) throughout
term of contract to fulfill
ongoing due diligence
responsibility
Select investment lineup that
meets risk and return
diversification requirements,
particularly if ERISA 404(c)
protection is invoked
Use third-party experts where
prudent
Develop, maintain and follow
formal Investment Policy
Statement
Monitor investment funds, even
in fully-bundled arrangements, to
maintain appropriate investment
mix and fee levels
Understand personal fiduciary
liability and purchase fiduciary
bond
Best Practice Fiduciary Oversight under ERISA
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Continued Challenges

9. MERCER 9
Continued Challenges
Effective committees
 Plans governed by professional and motivated boards with clear delegations
 Appropriate policies setting out strategy and beliefs and how to implement them
 Transparent accountability of all involved parties, minimizing conflicts of interest
 Regular review of plan performance, organizational structure and processes
 Formal reporting and communication channels for timely and reliable information sharing
Risk Management
Effective
committees
Written
plan
policies
Appropriate
accountability
Rigorous
oversight
& monitoring
Effective
information
flow
Mercer’s Principles of effective governance TM
Set Direction Implement Monitor

10. MERCER
Today’s 403(b) Plans
• What do 403(b) plans look like today?
– More plans have become subject to ERISA due to
­ Regulatory requirements
­ Plan design changes
­ Vendor consolidation and investment selections
– More vendor consolidation; trend to exclusive vendor
­ Regulatory compliance
­ Fee and service leverage
­ Administrative outsourcing
– More open architecture with streamlined investment lineups and fewer
annuity products
­ Helping to improve fiduciary oversight and participant outcomes
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11. MERCER
Today’s 403(b) Plans
• What do 403(b) plans look like today?
– More fee transparency and revenue reconciliations
­ Negotiated fees on individual plan level
­ Transparency of fees and vendor revenues
­ Efficiency of reduced vendors and streamlined investments
­ ERISA plans subject to fee disclosure requirements
– Fee disclosures
­ ERISA plans subject to 2012 fee disclosure rules
­ Service provider to plan sponsor
­ Plan sponsor to participants
­ Non­ERISA plans not subject to rules, but vendors may provide similar
information and templates
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12. MERCER 12
Fee Disclosures
Provider to
Plan
Sponsor
Plan
Sponsor to
DOL
Sponsor to
Participants
 Effective in 2012
 Requires disclosure of direct
and indirect compensation in
writing to plan’s fiduciaries
 Noncompliance is ERISA
prohibited transaction
 Comment period ended in
August – minor modifications
possible
 Expanded reporting via Form
5500, Schedule C beginning
with 2009 plan year filing
 Covers provider fees and other
compensation (direct and
indirect) paid by plan assets
 No exemptions for service
providers unable to capture
required information after 2009
plan year filing
 Effective in 2012
 Requires annual and quarterly notices, plus
initial notice on or before eligibility to direct
investments
 Failure to provide disclosures could be a
breach of fiduciary duty, although sponsors
may reasonably rely on information from
service providers and investment funds

13. MERCER
Today’s 403(b) Plans
• What do 403(b) plans look like today?
– 403(b) prototype document program
­ IRS is accepting requests for document approval
­ Sponsors that adopt a pre­approved prototype document from a third
party can rely on the IRS approval of its plan provisions
­ No program anticipated for individually designed plans
– All factors combining to result in a higher level of understanding on part of
plan sponsor as to plan utilization, fiduciary responsibilities, leverageable
opportunities, vendor services, and overall value to participants and
organization
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14. MERCER
What’s Next?
• What can 403(b) plan sponsors expect to change in the near future?
– Increased scrutiny by IRS and DOL
­ Universal availability
­ Overall compliance
­ Timeliness of contributions
­ Fee disclosures
­ Fiduciary status
­ Self­directed accounts
– Continued growth of and focus on oversight and plan/vendor/service/fee
monitoring
­ 401(k) plan litigation moving into tax­exempt sector
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15. MERCER
Questions?
• Questions?
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