'Two' Works for 403(b) Plans

Written by: Bob Toth

At long last, a DOL official has spoken publicly about what constitutes a "reasonable choice" under its 403(b) "safe harbor," 2510.3-2(f)(3)(vii). 

At stake here is the answer to the question of when and whether any particular 403(b) plan is subject to ERISA, a topic upon which we have recently blogged.  One of the requirements of the regs' safe harbor is that the employer must make a reasonable choice of vendors available to its employees in order to avoid the 501(c)(3)organization's 403(b) plan from being considered subject to ERISA.  This is an important question, given the substantial new disclosure rules and Form 5500 rules to which these plans will become subject.

Most private company 403(b) plans limit the number of vendors available under their plans.  The ERISA question is how far can the employer limit vendors on a non-ERISA plan without triggering ERISA coverage?  Susan Rees, a pension law specialist at the EBSA, recently stated at an ALI-ABA conference that at least two vendors must be offered, though if the employer is small enough, only one vendor may need to be offered.  Conventional wisdom over the years has pegged the number at three, but just having a DOL staffer publicly comment on what an appropriate number can be is just the sort of "informal" guidance for which we have been looking for a number of years.

Rees's comment provides a two-edged sword.  It puts in the bag advice that practitioners have been giving to 403(b) clients over time: if the employer has any significant number of employees, limiting their choice to a single vendor will likely trigger ERISA coverage.  What the comment does NOT address is the position of some employers and vendors that a single vendor does not trigger ERISA coverage as long as a sufficient number of investment accounts managed by different investment companies are offered under the annuity contract.  The comment doesn't seem to support this position, as there are some very real differences between vendor contracts that go well beyond mere investment choices.

Thank you Ms. Rees. This helps much.