Plan Improvement Glossary of Concepts and Terms

This information is most useful for those who are looking to help plans improve their choices and services.

These terms are the first discussed, as they are rarely in use today. For purposes of improving 403(b) or 457(b) Plans, they are encouraged for use when possible. (PLEASE NOTE: a few states continue to have a requirement that school districts must allow any financial services company that meets certain criteria to offer its 403(b) products to the district’s employees. This means that school districts cannot restrict the number of providers or choose which providers are allowed to participate in the plan.)

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Auto-enroll: A provision that allows for a payroll-deduct 403(b) or 457(b) retirement plan contribution to be automatically made for all new employees upon their hiring. This is most often a modest contribution (1%-3% of gross pay) and any employee may opt-out of having this contribution made on their behalf. Auto-enroll provisions have proven to be very effective savings enhancements in 401(k) plans.

Default Investment Option: In an auto-enroll plan, the employer or other designated party chooses a default investment option if a contributing plan participant neglects to make an investment choice from among the available options. This default option is often a guaranteed interest account or a target date fund that is used based on the employee’s age.

Opt-out: In the context of A 403(b) or 457(b) plan, this term most often means an employee asking for no contributions to be made to the plan. Note that all auto-enroll plans have an opt-out provision.

403(b) and 457(b) plans must have at least one investment provider, and most also have a TPA. 

Investment Provider (aka Vendor): A company providing investments to 403(b) or 457(b) plan participants. An investment provider may choose to offer any combination of mutual funds, annuities or fixed interest guaranteed options to plan participants.

Third Party Administrator (TPA): A company providing IRS and DOL compliance services to a 403(b) or 457(b) plan. These services include compliance testing for plan participant loans and withdrawals. Unlike a 401(k) Third Party Administrator, non-ERISA 403(b) TPAs are not required to perform much of the regulatory work required in ERISA plans.

 

403(b) and 457(b) plans ARE allowed to choose and manage the investment providers they make available to their plans. When making changes to a plan’s providers, these are often terms used for decision making.

Grandfathering (no new hire contributions): A 403(b) or 457(b) plan sponsor may select to remove an investment provider(s) from the plan for any number of reasons. When doing so, the plan sponsor can no longer allow newly hired employees to contribute to that provider. Any employee currently contributing to that provider can continue their contributions to that provider OR transfer their account or their contributions to any of the other approved plan providers.

Grandfathering (no future contributions): A 403(b) or 457(b) plan sponsor may select to remove an investment provider(s) from the plan for any number of reasons. When doing so, the plan sponsor may choose to no longer allow any future contributions to that provider. In this scenario, all employees currently contributing to that provider must choose a new provider from the providers who remain approved in the plan (or discontinue their contributions entirely).

Single Vendor Plan (aka Single Provider Plan): A 403(b) or 457(b) plan that only has one plan investment provider. The plan sponsor can choose to eliminate all plan providers except for one. In this case, they may choose one of the grandfathering options.

Multi-Vendor Plan (aka Multi-Provider Plan): It is estimated that over 90% of Public School K-12 plans have more than one plan investment provider. This can be both an opportunity and a challenge for plan sponsors and participants. One of the greatest challenges of a multi-vendor plan is the overwhelming scenario of choosing an appropriate provider and choosing from amongst its investment options. This is precisely where fewer providers and/or qualified financial advisors are important.

Most 403(b) or 457(b) plans offer one or more providers who have various types of representatives who work with the employees who have accounts with the provider whom they represent. The qualifications of these representatives can vary dramatically, and most will fall into one or more of the following categories.

Certified Financial Planner (CFP): Certified Financial Planner (CFP) is a formal recognition of expertise in the areas of financial planning, taxes, insurance, estate planning, and retirement saving. Owned and awarded by the Certified Financial Planner Board of Standards, Inc., the designation is awarded to individuals who successfully complete the CFP Board’s initial exams, then continue ongoing annual education programs to sustain their skills and certification. [MORE: https://www.investopedia.com/terms/c/cfp.asp]

Registered Investment Advisor (RIA): A registered investment advisor (RIA) is a financial firm that advises clients on securities investments and may manage their investment portfolios. RIAs are registered with either the U.S. Securities and Exchange Commission (SEC) or state securities administrators. RIAs and the people who work from them have fiduciary obligations to their clients, meaning that they have a fundamental duty to always and only provide investment advice that is in their client’s best interests. [MORE: https://www.investopedia.com/terms/r/ria.asp]

Investment Advisor Representative (IAR): Investment advisory representatives (IARs) are licensed and authorized personnel who work for investment advisory companies and are permitted to work with clients. The primary responsibility of an IAR is to provide investment-related advice as a financial advisor or financial planner. To become an IAR, individuals must pass the appropriate licensing exam or exams and register with the appropriate regulatory bodies. [MORE: https://www.investopedia.com/terms/i/iar.asp]

Registered Representative: A registered representative (RR) is a person who works for a client-facing financial firm such as a brokerage company and serves as a representative for clients who are trading investment products and securities. Registered representatives may be employed as brokers, financial advisors, or portfolio managers. Registered representatives must pass licensing tests and are regulated by the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC). RRs must furthermore adhere to the suitability standard. An investment must meet the suitability requirements outlined in FINRA Rule 2111 prior to being recommended by a firm to an investor. The following question must be answered affirmatively: “Is this investment appropriate for my client?” [MORE: https://www.investopedia.com/terms/r/registeredrepresentative.asp]

Agent: A person who has been legally empowered to act on behalf of another person or an entity. An agent may be employed to represent a client in negotiations and other dealings with third parties. The agent may be given decision-making authority.

The regulations that apply to investments are vast. Knowing the following regulatory terms can be helpful, especially when evaluating any provider representative with whom employees encounter.

Fiduciary: A fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients’ interests ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other’s best interests. A fiduciary may be responsible for the general well-being of another (e.g., a child’s legal guardian), but the task often involves finances—for example, managing the assets of another person or a group of people. Money managers, financial advisors, bankers, insurance agents, accountants, executors, board members, and corporate officers all have fiduciary responsibility. [MORE: https://www.investopedia.com/terms/f/fiduciary.asp]

Broker/Dealer: A broker-dealer (B-D) is a person or firm in the business of buying and selling securities for its own account or on behalf of its customers. The term broker-dealer is used in U.S. securities regulation parlance to describe stock brokerages because most of them act as both agents and principals. A brokerage acts as a broker (or agent) when it executes orders on behalf of its clients, whereas it acts as a dealer, or principal when it trades for its own account. [MORE: https://www.investopedia.com/terms/b/broker-dealer.asp]

Reg BI: Regulation Best Interest (BI) is a Securities and Exchange Commission (SEC) rule that requires broker-dealers to only recommend financial products to their customers that are in their customers’ best interests, and to clearly identify any potential conflicts of interest and financial incentives the broker-dealer may have for the sale of those products. It is related to the U.S. Department of Labor’s (DOL) fiduciary rule. The Regulation BI rule falls under the Securities and Exchange Act of 1934 and establishes a standard of conduct for broker-dealers when recommending any securities transaction or investment strategy. [MORE: https://www.investopedia.com/what-is-the-sec-s-regulation-bi-best-interest-rule-4689542]

There are different ways employees contribute to, and exchange accounts between, 403(b) and 457(b) providers and plans.

Payroll Deduct Contribution: When an employee makes a regularly scheduled contribution to the 403(b) or 457(b) plan. With the absence of an auto or default enrollment provision, a Salary Reduction Agreement is often necessary to start contributions.

Salary Reduction Agreement: The agreement by which the employee asks the employer to deduct a specific amount (often as a specific dollar amount or percentage of gross salary) of pay and remit it to the chosen investment provider.

Rollover: A transfer of account from one approved plan provider to another, OR a transfer of account from the participant’s 403(b) or 457(b) to an investment company product that is not part of the plan.

Plan Sponsor – In the context of a 403(b) or 457(b) plan, this is usually the employer, who oversees the plan.

Plan Participant – In the context of a 403(b) or 457(b) plan, this is usually the employee, who contributes to the plan or has an account in the plan.