DTCC Gears Up to Help the 403(b) Plan Market Meet Upcoming Regulatory Requirements
There is nothing like a looming regulatory deadline and a tight development timeframe to focus an industry’s attention on automating its business practices. That was the consensus at a June 3 meeting of major stakeholders in the 403(b) retirement plan market. The meeting, which included senior representatives of insurance and mutual fund companies, DTCC and other participants, was organized by DTCC in cooperation with The SPARK Institute (Society of Professional Asset Managers and Record Keepers).
A 403(b) plan is a tax-advantaged retirement savings vehicle for public institutions such as universities, schools, foundations and hospitals.
Attendees of the meeting endorsed a data-sharing plan that will enable this growing industry segment to meet regulatory require-ments that take effect Jan. 1, 2009. On that date, regulations will shift to employers/plan sponsors the responsibility for monitoring accounts and providing information to the Internal Revenue Service (IRS). Currently, employees are required to self-certify their compliance with IRS rules.
Need to automate
To meet this regulation-driven challenge, the insurance and mutual fund industries along with plan sponsors and their administrators have turned to DTCC. The goal is to automate 403(b) information-sharing by leveraging DTCC’s centralized data clearing capabilities, which already connect most of the insurance carriers and mutual fund companies that are active in the 403(b) market.
“We were able to get key stakeholders to sit down together and confirm the basic tenets of our automation approach,” said Lana Macumber, DTCC director, Strategy and Business Development, Insurance Services, who chaired the meeting. “Having the right people in the room right from the start makes the planning process more efficient, which is a real plus when facing a fixed and fast-approaching deadline.”
DTCC’s ability to handle high volumes of standardized data in a secure environment places it in a strong position to help the 403(b) market address the regulatory challenge it faces, according to Barbara Simon, DTCC vice president, Product Development, Wealth Management Services. “DTCC has a history of developing low-cost, compliance-ready solutions to meet the needs of the insurance and mutual fund industries,” said Simon. “And our ability to leverage existing capabilities will ensure a quick-to-market service for the 403(b) market.”
What will change?
Different from 401(k) plans, 403(b) plans require the individual employee/participant to certify that he or she is abiding by IRS limits for contributions, loans, hardship withdrawals and other transactions – a system that can lead to abuse.
The regulations that take effect in January 2009 will shift this responsibility to employers/plan sponsors (generally through the administrators that handle their account transactions). They, rather than the account holder, will be required to monitor all account activity to ensure participants comply with IRS rules governing accounts.
In order to monitor, supervise and authenticate employee activity, employers/plan sponsors and vendors will need to share account information. Since many plan sponsors rely on third-party administrators (TPAs) to handle the regular management of the accounts and, in some cases, information aggregators to organize the information from multiple vendors, information-sharing solutions among all parties will be a primary challenge of the new regulatory regime.
Growth in the 403(b) Market
403(b) plans are a rapidly growing retirement savings vehicle. At the end of 2007, the value of this market totaled almost $700 billion, which equals about 17% of the $4.2 trillion market in defined contribution assets. About 80% of the 403(b) market is in variable and fixed annuities with the remaining 20% in mutual funds. With a predicted 8% compound annual growth rate, this market potentially represents millions of records that must be managed.
Developing standards
The SPARK Institute, representing the retirement plan services industry and working with its members, formed a task force in early 2007 to address problems of data standardization for 403(b) accounts. The task force created draft standard layouts to support the new information-sharing requirements.
In November of 2007, the industry approached DTCC to explore options for establishing a central data-clearing facility to link all parties sharing the 403(b) account data using the SPARK standard layouts.
At the June 2008 meeting, representatives from major vendors, aggregators and SPARK, along with DTCC staff from Insurance Services, Wealth Management Services and Technology, established a basic timeline and action plan for developing a new information-sharing service.
The plan calls for DTCC to support two initial services to meet information-sharing requirements: “point-in-time” periodic reporting and “request/response,” which is transaction based.
Point-in-time processing will provide a periodic “snapshot” of all relevant annuity contract and/or mutual fund information related to individual employee 403(b) investments. Data will be sent to the plan sponsor or designated representative, such as a TPA.
The request/response service will process responses from all vendors within the plan to an employer request for current employee account information needed to supervise and process specific employee transaction requests, such as hardship withdrawals or loan requests. @