New Rules From IRS Mean Big Changes for 403(b) Retirement Plans

July 28, 2007

The Internal Revenue Service issued new rules on Thursday that will radically reshape 403(b) retirement plans, which are most commonly offered at schools, colleges, and other nonprofit organizations. According to today’s Wall Street Journal, the long-awaited rules will make 403(b) plans more like 401(k) plans, which are more common in the private sector.

The IRS devised the new rules, which take effect in 2009 and are the first comprehensive revisions in some 40 years, in order to make it easier for the tax agency to track investments in the plans and withdrawals from them.

Many colleges have already instituted the changes required by the rules, the Journal said, so the effect is likely to be most drastic for public schools and small nonprofit organizations offering 403(b)’s, which are defined-contribution plans that pay out to retirees the amount of pretax money put into them, plus all investment returns. Many of the investments are annuities.

Under the new rules, employers will have to increase their oversight as sponsors of the plans, and will be required to provide participants with much clearer information about them. Participants in the plans might have more investment options, with the potential for lower costs and higher returns, but they may find it more difficult to move their investments around. The Journal speculated that big mutual-fund companies may displace insurance and other firms as the chief administrators of the plans.

The Journal quoted an analyst as predicting “a shake-up in the industry.” —Andrew Mytelka