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AlbanyConsultant

Start a new 403b because old provider's CDSC is too high?

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A financial advisor asked for help where an ERISA 403b plan is with one of the less-than-friendly 403b providers, and the plan sponsor is fed up with them.  However, the plan sponsor learned that most participants will get hit with a large back-end fee if they move their money at this point.

I suggested that we create a second set of accounts at a more friendly recordkeeper and call it all one plan under a new document (which I've done with plans on this provider before), but the financial advisor said that he has had better luck freezing the accounts where they are and creating a new 403b plan that allows transfers into it from the old plan (but not back the other way!).  All new contributions will only go to the new accounts, and the FA can monitor when the sales charges have dwindled down to zero or some other acceptable number and advise each participant individually as to when to move to the new accounts.  Eventually, when everyone moves over, they can terminate that plan.

I have to say, the idea of not having to fight with Ye Olde Unfriendly Recordkeeper for information is appealing, but this seems like it's too good to be true.  So we'd be leaving them with two plan documents (presumably that rk is going to help with the restatement of their plan, but I don't know that for sure), two 5500s, and each person getting two statements, and of course 2x the risk for an audit.  The current accounts do allow loans, which might make things a little harder.  What other pitfalls could there be in this arrangement?

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Check the contract.  It might say that a discontinuance of contributions might trigger the CDSC anyway....

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Financial adviser shouldn't be sticking his nose into plan design issues unless he can cite specific reasons/examples of why creating another plan is better.

I would stick with your original approach UNLESS the plan is currently subject to annual audit (possibly due to former employee balances) and establishing a new plan would not create a 2nd audited plan and might eventually get the first plan out of audit as the participant count decreases.

If you do establish a 2nd plan why not go with a 401(k)?

 

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Your original approach is the correct one.  One advantage of being an independent TPA is that you can create a plan which is not limited to one set of investment contracts.  The other part about "eventually they can terminate the plan" is also a problem.  The 12 month rule will always be a problem in this situation.  You will never be able to terminate plan #1.  Advisors and some vendors in 403(b) confuse contracts with plans.  I suggest it is part of the advisor's confusion concerning any possible advantage of a second plan.  What would the advantage be, anyway?  There is nothing you couldn't do with your document and administration policies and procedures.  You can certainly list contracts #1 as "Unapproved" for contributions or transfers but part of the plan for the 5500 etc.

I think the fact that the current accounts do not allow loans makes administration easier.  Just use the loan policy to limit the loans and the amount considered for a loan to the amounts in the new investment contracts.  It may also motivate some participants to move their money. 

I disagree with Flyboyjohn about 401(k)'s of course.  Testing can be a huge problem for nonprofits.  What would be the advantage of a 401(k)?  (The only one I can think of is that the 12 month rule does not apply in this situation... if you were going to follow this "create a 2d plan scheme.")

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I had forgotten about this post!

 

Flyboyjohn, none of those conditions apply (that I'm aware of), so I'm not trying to get around anything like that.  As to why not a 401(k), they don't intend to go safe harbor, and I, um I mean 'they' :) don't want to deal with nondiscrimination testing.  And I agree that the FA should leave plan design to the TPAs, but I'm willing to listen to new ideas; I'm still a novice in the 403b world, so it's possible that he had a good idea I hadn't encountered yet.

 

Patricia, the plan sponsor can terminate the current 403b because it's an ERISA plan, so the plan sponsor has authority over the accounts - it just doesn't want to exercise it currently due to the CDSC.  So the idea would be to let them sit there and dwindle until those fees are small enough to be bearable and then terminate - if participants need to be forced out at that time, so be it.

 

So it sounds like the FA's idea would work, but I just don't see any practical benefit to it - it might save the plan sponsor a little in our reconciling fees for collecting the data on those accounts.  What about preserving distribution options?  It seems like I wouldn't have to do that on a plan-to-plan transfer, which might be a benefit for me administering the 2nd plan...?

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You will end up with two plans and two 5500's etc.  You cannot terminate a 403(b) and start another 403(b) (with the same participants) within 12 months.    So if you start a new 403(b), how will you ever terminate the prior plan (no matter what the CDSC is) in light of the 12 month rule?

Your idea that the plan sponsor can terminate a 403(b) just because it is an ERISA 403(b) is just not sound.   If those are individual annuity contracts, the employer may not have the authority to terminate them.  The provisions in the annuity contracts will not permit it.

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From IRS site:

"If allowed by the terms of the plan, a 403(b) plan sponsor (employer) may terminate the plan and distribute accumulated benefits to the participants and beneficiaries on termination.

To terminate a 403(b) plan, the plan sponsor must take the following steps:

·        Adopt a binding resolution:

1.     establishing a plan termination date,

2.     ceasing plan contributions,

3.     fully vesting all benefits on the termination date, and

4.     authorizing the distribution of all benefits as soon as administratively practicable after the termination date;
 

·        Generally, stop contributions by the sponsor or any related entity to any other 403(b) plan during the period that begins on the termination date and ends 12 months after all benefits have been distributed from the terminated plan (this requirement may be disregarded if at all times during the period beginning 12 months before the termination and ending 12 months after all benefits have been distributed, fewer than 2% of the employees who were eligible to participate in the terminated plan are eligible to participate in another 403(b) plan of the sponsor);
 

·        Notify all plan participants and beneficiaries about the plan’s termination;
 

·        Provide a 402(f) rollover notice to participants and beneficiaries; and
 

·        Distribute all plan assets within 12 months of the plan’s termination date to participants and beneficiaries in accordance with Rev. Rul. 2011-7.

403(b) plans subject to ERISA may have to comply with additional requirements."

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