Jump to content

Old TIAA Individual Contacts - Any Fiduciaries?


Recommended Posts

The definition of a fiduciary is anyone with discretionary authority over plan assets. Are there any fiduciaries with respect to TIAA's old Individual Annuity products held by many schools/colleges? They have no control whatsoever which is why they are so frustrating from a fiduciary perspective. But perhaps that is their saving grace as a fiduciary?

Austin Powers, CPA, QPA, ERPA

Link to comment
Share on other sites

I am not sure what fiduciary responsibility there would be. If its a contract issued by one of the 50% of 403b plans that are not subject to ERISA then you need to look to state law which doesn't address this issue.

If the 403b contract was issued under an ERISA plan then you need to look at what fiduciary duties can be exercised by the plan. If the employee has complete control of the contract including the right to commence benefits there does not seem to be any fiduciary responsibility over the contract. There is a provision in the DOL regs that states that ERISA does not apply to an annuity contract distributed to an employee. If the individual owns the contract then it can be considered distributed to him. Its not perfect but its the only information on this question. I get SPD and SMM information from T/C on my individual contracts but that info is required under part I of ERISA.

What fiduciary duties were you thinking of?

mjb

Link to comment
Share on other sites

If fund A is a dog, what obligation does the trustee have to replace fund A with Fund B. And of course legally they have no ability to do that. So the fiduciary responsibility of monitoring plan investments and making sure they are appropriate.

IT seems to me there is a perpetual failure because the original failure was to enter into a contract under which the fiduciary is unable to exercise his or her legal responsibility.

Austin Powers, CPA, QPA, ERPA

Link to comment
Share on other sites

Q1. Just what T/C individual contracts are dogs? Only 2 funds that I am aware of that were issued as individual contracts are TIAA fixed and CREF stock which are not underperformers. I don't know if any of the VA funds added after 1986 are underperformers. Before going any further you need to identify specific funds in VAs which do not meet a plan's investment policy specs.

Q2 As I have mentioned previously what fid rules would apply in the case of an individual contract that has been distributed to the participant?

Q3 is there an actual client question or is this just hypothetical?

mjb

Link to comment
Share on other sites

A1: We love TIAA-CREF funds, so that's not the issue. But do they even have to be reviewed, and if the answer is yes, just what should the client do in the event that a fund does stink.

A2: None, I assume. I'm asking about the ones still under the Plans investment contract.,

A3: The client is trying to figure out what the heck they need to do. So it's not really hypothetical, it is a very real dilemma faced by my client.

Austin Powers, CPA, QPA, ERPA

Link to comment
Share on other sites

A1 Just which fund stinks? TIAA traditional pays 3- 4.5% fixed rate which is better than most annuities. TIAA has AAA rating. Cref stock has a 5 year average return of 12% and an average annual rate of about 10% since inception in 1952. Neither is an underperformer.

A2 see answer to A1 for contracts still under the plan.

A3. If there are no underperformers what is the dilemma faced by the client because there is no reason to review that question at this time. Are there other T/C investment that the plan fids are concerned about? Who is asking this question? Must be a lawyer.

mjb

Link to comment
Share on other sites

I happen to think it's a reasonable question. You may have knowledge/opinions about the appropriateness of these funds that a CFO/HR Director might not possess themselves. So if you were the fiduciary you would obviously be able to satisfy yourself. What obligation have they make those determinations? I think it's irrelevant whether or not the funds are any good. As we all know, past performance is not a guarantee of future results. So the wise fiduciary performs ongoing reviews.

Austin Powers, CPA, QPA, ERPA

Link to comment
Share on other sites

Austin. You keep missing the point which I asked previously in Q1 which is what does the Investment policy statement (IPS) for the 403b plan state are the criteria for removing a fund investment, e.g., bottom quintile in sector for last 3 years. The CFO/HR director needs to review the IPS because the IPS sets the standard for prudent investments in the plan, not their own subjective or uninformed opinions. If you cant answer that question there is nothing more discuss. FYI there is no expenses ratio in TIAA traditional. CREF stock ER Is .46%.

mjb

Link to comment
Share on other sites

I'll throw it back at you and say "what should the IPS say?" Surely the answer to this question is the same question that I am asking. What if the IPS did include some arbitrary criteria that did require the elimination of a fund. What then? So it stands to reason that the answer to my question must be known before you can draft an IPS.

But I agree there is nothing more to discuss...

Austin Powers, CPA, QPA, ERPA

Link to comment
Share on other sites

If you really want an answer to a question that exists only as a hypothetical here is the language for the IPS:

If the plan eliminates an investment option in an individual annuity contract which is no longer suitable and participants elect to continue to invest in such option for any reason, the plan will pay any and all damages resulting from the inability of the plan fiduciaries to change the investment option and all fiduciaries will be personally liable for the loss to be divided equally among them.

mjb

Link to comment
Share on other sites

We talk in hypotheticals all the time that are grounded in reality. Obviously you would not put such language in an IPS, but I found your hypothetical language a realistic incarnation of exactly my dilemma. Fiduciary responsibility with no ability to do a darn thing about it.

If you're trying to answer my question it is completely lost on me. Do you or don't think there is an issue here for fiduciaries of these old TIAA contracts?

Austin Powers, CPA, QPA, ERPA

Link to comment
Share on other sites

Idle question from a non-lawyer: If the fiduciaries have no authority to change the investments (which appears to be what is being said above), how could they be said to have violated their fiduciary responsibilities in any actionable way? It should not be possible to successfully sue someone for not doing something they are not permitted to do.

Always check with your actuary first!

Link to comment
Share on other sites

That was my original argument, but I think the original sin of course was perhaps to put themselves in that situation in the first place. I presented that exact analysis to an ERISA attorney and his response was that if any new money went to the plan after 1/1/09 that it would be subject to all of the fiduciary standards. .

Austin Powers, CPA, QPA, ERPA

Link to comment
Share on other sites

Austin:

You really need to think through the question you have posed and ask is there a problem. When ERISA became law in 1974 90% of 403b assets were managed by TIAA/CREF which had only two funds: TIAA fixed and CREF Stock where the all funds where held in individual contracts. Most of the individual contracts were non cashable. No one thought this was imprudent investing.T/C did not introduce group contracts until 87 or 88 and in any event there is no option to cancel or amend the terms of the individual contracts. In the 40 years since ERISA became law no one has questioned the suitability of investment of 403b assets in individual T/C contracts because there is no investment reason to do so. If there is no reason to question whether these contracts are prudent investments for an ERISA plan why are you asking about whether there is a breach of fiduciary duty to have these contracts in a plan?

mjb

Link to comment
Share on other sites

  • 2 weeks later...

If you really what to pursue the question of fiduciary liability you should research whether there were any lawsuits against employers who used Mutual benefit life annuities in their 403b plans. MBL was the 18th largest insurer when it became insolvent in 1994 and was taken over by the NJ insurance dept because it invested in 30 RE projects and which went bust. MBL annuities were used by many public and non profit employer 403b plans. MBL was AA rated until 60 days before it was taken over which prevented most owners of annuity contracts from withdrawing the funds. It took 7 years before MBL was able to collect enough revenue from the investments to pay off the policyholders. I don't know if any employers were sued because their 403b plans were funded with MBL annuities.

mjb

Link to comment
Share on other sites

The DOL took action against sponsors of terminated defined benefit plans that had bought annuities from Executive Life for having failed to properly discharge their fiduciary duties when they chose Executive Life as the insurer.

Always check with your actuary first!

Link to comment
Share on other sites

Austin - FWIW, here are my general thoughts:

I think the fiduciary of an ERISA plan has the duty to review these contracts for any new money. If they determine that they are inappropriate, don't allow any new deferrals/employer contributions to flow into them. As part of their normal fiduciary duty, they must provide appropriate investments to be available to plan participants, so they can select whatever investment options they deem appropriate for new money.

If they can't do anything about the old contracts, then why worry about it? If they are screwed for an "original sin" then they will remain screwed. But, I do believe that "prudence" standards are judged based upon the reasonable standard of prudence at the time of the investment. I find it hard to imagine that the DOL would attempt to assert that these were imprudent, based upon standards at the time.

I leave it to the lawyers for opinions as to whether a lawsuit by participants has any reasonable chance of success. These days, there are a lot of class action lawsuits, and I literally have no opinion as to whether such a suit might be successful or not.

Bottom line - I don't think I'd lose any sleep over it, because other than for new money, there isn't anything the fiduciaries can do about it anyway.

Link to comment
Share on other sites

Bottom line - I don't think I'd lose any sleep over it, because other than for new money, there isn't anything the fiduciaries can do about it anyway.

Well, couldn't; they advise participants to leave the investment and/or transfer their old accounts to the new "fiduciary friendly" contract?

Austin Powers, CPA, QPA, ERPA

Link to comment
Share on other sites

I actually started to put that suggestion in my previous post, then removed it as I wasn't sure if that opens up another can of worms. Actually advising participants to move the money isn't really the same thing as telling them that they may wish to consider moving the money. So I didn't go down that road intentionally...

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...