Choices That Must Be Offered to Participants

Q. Must a “safe harbor arrangement” under Department of Labor (DOL) regulation 29 CFR 2510.3-2(f) offer participants a reasonable choice of both 403(b) providers and investment products?

A. Yes. To meet the terms of the safe harbor, the arrangement generally must offer a choice of more than one 403(b) contractor and more than one investment product.

The preamble to the final regulation at 29 CFR 2510.3-2(f) explained that:

“[t]his [reasonable choice] provision is designed to prevent an employer not wishing to be deemed to be maintaining a pension plan from restricting products available to employees, or limiting available contractors to one selected by the employer when several seek to make their services and products available to employees, unless even in the presence of such limitation the employees of the employer are afforded a reasonable choice, in light of relevant circumstances.” 44 Fed. Reg. 23525, 23526 (April 20, 1979).

Similarly, in addressing public comments on this condition, the preamble said that:

“[i]f the employer chooses to engage in such limitation, the condition specifies that employees must be afforded a reasonable choice of both products and contractors under the relevant circumstances in order for the Department to consider the employer not to have established or maintained a plan. It may be that in some circumstances it would be reasonable for the employer to limit to one the number of contractors who may deal with employees under the section 403(b) program.” Id.

The DOL recognizes that the cost of permitting employees to make contributions through payroll deductions may be significantly affected by the number of 403(b) contractors to which the employer must remit contributions. This may be particularly significant for small employers concerned about the administrative complexity of offering access to multiple 403(b) providers under a safe harbor 403(b) arrangement that normally requires a very limited financial commitment on the part of an employer in the form of affording payroll deductions.

In the DOL's view, an employer could, consistent with the safe harbor, limit the number of providers to which it will forward salary reduction contributions to one if employees are allowed to transfer or exchange, in accordance with the IRS regulations, their interest to a 403(b) account of another provider. Also, there may be circumstances where an employer can demonstrate that increased administrative burdens and costs to the employer in offering a number of contractors under the arrangement would be sufficient to cause the employer to stop making its payroll system available to collect and remit payroll deduction contributions to any 403(b) contractor. In such cases, limiting available contractors to one offering a wide variety of investment products could be seen as affording employees a reasonable choice in light of all relevant circumstances as described above (e.g., a single insurance company's 403(b) compliant arrangement with access to a broad range of affiliated investment products or a single 403(b) compliant "open architecture" custodial account platform giving employees access to a broad range of unaffiliated mutual fund investment products).

In any case in which the employer limits the availability of providers in a 403(b) safe harbor arrangement, affording the employees a reasonable choice under the circumstances requires that limitations on or costs or assessments associated with an employee's ability to transfer or exchange contributions to another provider's contract or account be fully disclosed in advance of the employee's decision to participate in the program.