Implications of Unitization for 403(b) Plans

Q. Holdings in model portfolios may be shown on a participant statement, or, these models may be “unitized” and reported on statements with a daily net asset value, similar to a mutual fund. What are the implications of unitization for 403(b) plans?

A. This is where the Securities and Exchange (SEC) rules governing 403(b) and 401(k) plans seriously diverge. Unitizing a model portfolio in a 401(a) plan has been a regular practice for decades, even back to the “balance-forward” days of plan administration. This has been possible because of the securities laws exemptions for 401(a) plans. However, the “unitized” unit of a 403(b) model portfolio does not have the same exemptions. It may well be a security that needs to be registered. Unitizing is also likely one of those factors which would trigger the registration of the model portfolio as an investment company. If you are engaged in this practice, seek advice of your legal or compliance staff.