401(k) plan has separate annuity contracts, employer wants to transfer plan

[katieinny]

We haven't been asked to take on this case yet, but I want to be ready if anything comes of it. A not-for-profit has a 401(k) plan (I specifically asked if the caller meant 403(b) and was assured that we're talking about a 401(k) plan) that is apparently invested in individual annuity contracts for the employer's nearly 1000 participants. The employer wants to move the plan to another investment firm. The current provider (and holder of these annuity contracts) says that each participant must agree to the transfer because each person has his or her own contract. I was flabbergasted when I heard that. Could that be true?

[K2retire]

I've heard similar arguments by providers trying to keep the business from leaving. If the accounts are properly titled in the name of the plan trustee fbo each participant, the signature of the trustee should be all that is necessary. If the accounts are not titled properly, you may have to go back to who ever set them up wrong to enlist assistance correcting them.

[katieinny]

Thank you, K2retire. So far, this provider is insisting that the contract language is the only thing that governs how the assets are handled. Their position is that the employer has no right to infringe on the contract between the provider and the plan participant. The statement I read today says "The employer is granted no ownership rights in the vested accumulations. Therefore, the employer cannot mandate the transfer of accumulations to other investments whether inside or outside of the certificate." This is crazy!!

[david rigby]

Is the employer obligated to continue providing the plan?

[SFSD]

You need to get to the right person at the insurance company. Try for a department that may be named "Policy Title" or "Pension Department." If you get desperate, try Legal Department! I used

to work in the insurance industry so can assure you someone knows what's going on. You just have to find that person/department. This does sound like a 403(b) plan. You might want to see if you can get a look at one of the policies. The application at the back should show who is the owner and that should be the Plan Trustee(s) as someone posted earlier.

[katieinny]

David: Are you saying that the only way out of this is to terminate the plan? One of the problems with that is that they would not be able to set up another plan with another investment firm for 12 months.

This provider is so used to the way 403(b)s operate that the concept of a governing plan document seems foreign to them. The provider's rep said that ERISA can't require them to violate the terms of the contract they have with the employee. And the rep goes on to say that the employer's fiduciary responsibility does not give the ".....fiduciary extra-legal powers, such as the power to void valid and otherwise enforceable contracts." Then the rep goes on to discuss contract law. Good Grief.

[katieinny]

SFSD: Yes, I would like to see all the documents involved, but I'm waiting for confirmation that our firm will be retained to handle this matter. What I'm worried about is that whatever paperwork was completed years ago, when this plan was initially transferred to this provider, was filled out incorrectly. Things were hunky-dory while the status quo was maintained. Now the applecart has been upset and the sky is falling.

[david rigby]

David: Are you saying that the only way out of this is to terminate the plan?

No, but the employer's involvement (expense) in administering the plan gives it some leverage in how future administration should be conducted.

[Lou S.]

David: Are you saying that the only way out of this is to terminate the plan? One of the problems with that is that they would not be able to set up another plan with another investment firm for 12 months.

This provider is so used to the way 403(b)s operate that the concept of a governing plan document seems foreign to them. The provider's rep said that ERISA can't require them to violate the terms of the contract they have with the employee. And the rep goes on to say that the employer's fiduciary responsibility does not give the ".....fiduciary extra-legal powers, such as the power to void valid and otherwise enforceable contracts." Then the rep goes on to discuss contract law. Good Grief.

You may need an attorney involved but sometimes a letter telling the invesment company that are in direct violation of the trustee's written direction (along with the relavant portions of the Plan Document and Trust agreement) and that they are assuming full descrtionary fiduciary athourity over the assets that they refuse to transfer at the direction of the trustees and that they will be responsible for restoring any losses for failure to comply with the written request.

We've found that rather effective in the past in situations such as this.

If this does turn out to be individual 403(b) contracts and not a 401(k) plan though, you may be out of luck.

[austin3515]

But what about this: A plan funded solely through an insurance contract is not required to have a trust, and threfore, there might not be a trustee. At the risk of suggesting I have any on-point experiences, could the rule I just provided lend some credibility to the insurance company's position?

[katieinny]

I suppose anything's possible at this point, but the plan was transferred from a more traditional 401(k) type investment firm several years ago, so I bet back then there was a trustee. That might have changed when it got to the current annuity provider. The employer might not have understood what was happening at the time. If that's the case, you might be right, Austin.

[rcline46]

If Austin is correct, I wonder what the 5500 shows? Irrevocable commitments to provide benefits are not listed as assets on the 5500. Contributions and payments to insurance company with no assets!

If not 100% vested, I wonder how they recapture the forfeitures?

This sounds like an 'interesting' (read costly) plan.

[Lou S.]

This sounds like an 'interesting' (read costly) plan.

And with a 1000 participanst I can only imagine what the independent audit looks like with all those individual contracts.

[austin3515]

TIAA-CREF, as an example, has many plans that are all individual contracts. They built their system to be able to run reports that look just like John Hancock (ie., trust level, participant detail reports). I assume they are not the only ones who know how to do this - especially if they were able to pick up a 1,000 life plan!

[SFSD]

katieinny - maybe you don't want this one after all?

[katieinny]

Austin: So, do you think TIAA-CREF would set up a 401(k) plan where the employer has no control over transferring the assets?

I have no idea what the 5500s look like at this point. I'll cross that bridge when I come to it -- if I come to it. Maybe SFSD is right and this will be a bigger headache than I can handle.

[K2retire]

Finding a copy of the 2009 5500 on the DOL's website might be very enlightening.

[austin3515]

I think I had mentioned earlier though I have little or not actual experience with the subject matter, so I have no idea if it's leagal or not. But if it was legal, and they could permanently hold the money, you bet they would. That's exactly what they did in the 403b market. Even the clients that hate TIAA (and some do) are totally and competely, and irrevocably STUCK for this very reason. But of course, in TIAA's defense it was borne of a different era altogether.

As a practical matter, I have a hard time believing a 401k would be banned from investing in such a product.

[katieinny]

I pulled the 2008 5500 from FreeERISA. The title of plan confirms 401(k). Under funding arrangement and plan benefit arrangement boxes 1 (Insurance) and 3 (Trust) were marked. There's a Sch D (DFE). The Sch H shows assets under only 2 catagories -- some under pooled separate accounts, but mostly under registered investment companies. I don't prepare 5500s, but it looks normal to me.

[Guest Deflector]

Assuming the contract states only the participant can sign for a transfer, can the plan trustee/fudiciary force the participant to sign off on the distribution. Meaning the trustee/fudiciary can not break a contract, but they do have authority over what the participant's investment options are. Invoking that right, can they force the participant's to sign by claiming that is not an approved investment option of the plan.

Of course you wouldnt want to do that with 1000 participants, but I was wondering if this is an option if you had to get the money out of that platform.

[katieinny]

Deflector: I don't know the answer to that, but I sure hope it doesn't go that far. There has to be a better way. I was wondering if anyone had any comments on the 5500 information I posted above.

[Guest Deflector]

I have seen your situation on a Money Purchase Plan. Based on your findings it looks like it may be a 401(k), but even if you prove it is a 401(k) Plan, they will (probably) tell you the same thing ... "can not break contracts".

Your best bet may be to look at the contracts and hope they are in the name of the company FBO participant, as someone suggested before.

[rcline46]

If no schedule A, then it would not be an annuity product as I understand the rules. Even if the insurance company is recordkeeping the plan, because of the Schedule D, the accounts are held in omnibus accounts and not true individual accounts (as I understand it).

You need to speak with someone (if you get the case) who knows what is going on, AND as said before, you need to see the contract(s).

[katieinny]

rcline46: My fear is that there is no such person (who knows what's going on). We certainly can't rely on the investment provider, and the employer is as shocked by this turn of events as I am. Thank you all for your thoughts and suggestions. It has really helped to get input from others in the field.

[K2retire]

The 5500 indication of a trust certainly implies that there is a trustee somewhere. You definitely need to see the contract that they are saying can't be broken.