Investment Options FAQs

A Nationwide^® retirement plan plan sponsor wants some type of statement for participants that says I am making these investment choices myself and take responsibility for them being allowable investments under the laws governing the plan. The advisor seemed most concerned about the investments chosen being ALLOWABLE under the ERISA/IRC sections that govern the plans.

There is no such thing called "release language" in concept, theory or practice...
The plan document and trust agreement govern the what, when, and how of the plan investments. While the documents govern plan investments and participants are responsible for their own investment decisions — the plan's responsible plan fiduciary is responsible for the core investment lineup, monitoring that lineup and making any changes to it.

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For lack of a better way to describe them, 403(b) annuities or 403(b)(7) custodial arrangements are the equivalent of a 401(k) plan for those that work in the not-for-profit sector.

Participants in a 403(b) may or may not actually be part of a plan covered by ERISA depending on whether or not their employer makes a contribution and, for reasons that will have to be expanded upon elsewhere, the type of not-for-profit organization that sponsors the plan.

New regulations, have attempted to add some clarity by requiring 403(b) plans to have a written plan document. However, at this time, the IRS has no model plan document. The biggest complication here is that, unlike 401(k) plans, 403(b) plans often allow multiple vendors to have access to their participants. Instead of having a menu supported by one vendor, such as Fidelity, a 403(b) participant may be able to make contributions to Fidelity, VALIC, TIAA-CREF and many other vendors active in that marketplace. Each of these vendors has their own agreement and contract with unique provisions. The new plan document is required to encompass all of the provisions from all of the various vendors.

Participants have also long had the ability to transfer assets tax-free between 403(b) plans under what is known as IRS Revenue Rule 90-24. These transfers could take place regardless of the benefits and distribution requirements under either plan involved in the exchange. The new regulations complicate this process by stating that, effective September 24, 2007, employers are required to ensure that the distribution provisions of the plan/vendor receiving the transfer are at least as stringent as the plan/contract where the assets currently reside.

Even the termination of a plan has taken a turn for the complicated in the new regulations. Prior to the new regulations, there was no way to terminate a 403(b) plan. This was a particular pain to those who wished to terminate their 403(b) plan and establish a 401(k) plan in its place. Without the assets from the terminated 403(b) plan, the employer would have to start a brand new 401(k) — many vendors won't offer their 401(k) product to a "start-up" plan and those that do charge a premium. So, in the past the option was to have a "frozen" 403(b) and a "brand new" 401(k). This undoubtedly increases plan expenses for multiple plans to a single plan sponsor.

The new regulations allow the 403(b) to be terminated but require that all assets be paid out directly to the participants. Employers can't take the existing assets of the 403(b) and transfer them to a new 403(b) or 401(k) - though this is common practice in the for-profit arena where assets from a terminated 401(k) or profit-sharing plan can be transferred to a new plan. Conduit IRAs would have to be established and the re-transferred to the new 401(k) plan that has language accepting trustee to trustee transfers.

As you can see, it is not a regulatory burden but rather a logistical one. Multiple vendors, no model document and conduit IRAs all contribute to the logistics and must be addressed as efficiently as possible.

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There are no concerns other than the usual fiduciary matters. There would be no additional bonding requirements and the REIT would be considered a plan asset.

The Department of Labor Regulations provide that when an employee benefit plan acquires an equity interest in a fund, the plan’s assets will include both the plan’s equity interest in the fund as well as an undivided interest in each of the fund’s underlying assets. These assets thereby become “plan assets,” which are subject to the fiduciary responsibility and prohibited transaction rules of the Regulations. This is known as the “look through” rule of ERISA’s plan assets regulations.

Section 3(21) of ERISA defines “fiduciary” as anyone who exercises discretionary control or authority with respect to management of a plan or plan assets. It follows that if the underlying assets of a fund are considered to be the assets of the pension plan that invests in the fund (i.e. “plan assets”), then the fund’s manager will satisfy section 3(21)’s definition of a fiduciary and be subject to ERISA’s fiduciary rules. The fiduciary rules are contained in section 404(a)(1) of ERISA. These rules impose a duty of care, diligence and loyalty upon fiduciaries, as well as a duty to diversify the investments of the plan so as to reduce the risk of loss. Further, sections 406(a)(1)(A) through (E) prohibit a fiduciary from knowingly or negligently engaging the plan in certain transactions (“prohibited transactions”) with a “party in interest.”

Thus, if the underlying assets of the fund are deemed plan assets, then the manager (or general partner) of the fund will be constrained by the forgoing duties and prohibitions as a fiduciary with respect to the ERISA plan. As a deemed fiduciary, the manager would be required to discharge his duties solely in the best interests of the plan. In addition, ERISA imposes special reporting and information disclosure requirements regarding the entity whose underlying assets are considered plan assets.

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