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Old Frozen 403b / Individual Contracts / Fiduciary Liability


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Client has an old 403b, pre 1/1/09 contracts.   They need to sign off on distributions and she wants to know if she has any fiduciary liability with respect to these old contracts.  They are all individual contracts, such that they cannot move them to a new provider without consent and they cannot change the funds available as they would in a 401k because they are essentially IRA's.

I gather the answer is "yes" but curious if anyone has an article I can provide that sort of delves into this issue in some amount of detail.

Also curious what others are doing about the these "ancient frozen Non-ERISA plans" and the related plan documents.  A lot of sponsors don't even know these plans are out there (they only find out about them a participant comes out of the woodwork for a distribution).

Austin Powers, CPA, QPA, ERPA

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Since the contracts can't be moved and the investments can't be changed, the client's only power is to approve or not approve a distribution.  I suppose they would have to exercise that power in a prudent manner (i.e., not permitting a distribution that would violate the terms of the plan).  But the current fiduciaries wouldn't be liable if the plan was just invested in bad investments, because they would have no power to change that.

I do wonder about the potential liability of those who set up those old contracts, though.  I'm old enough to remember a time when the way a 403(b) got set up was often that an insurance agent came through town and said, "I've got this great new plan that gives your employees a tax advantage and doesn't cost you anything.  Just sign here and send us the money from your employees' paychecks every month."  So the employer signed up for a plan that allowed only for investment in that company's annuities, without ever thinking at all about whether there were better products out there.  And those annuities often had surrender charges that effectively prevented the employee from moving money out of them.  Is the fiduciary from 1980 going to be held liable if someone turns up today and says, "I have a pitiful retirement account, which could have been much larger if you had stopped for one minute to figure out what a good investment would be"?

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The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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Agree with Carol----and recent studies show that hospital employees and teachers especially may be woefully unprepared in the financial planning arena, hence they have been (and are) prime targets for these annuity salespeople many years ago. I'd vote for a law that shortens annuity withdrawal provisions to no more than 3 years (10 years plus is a lifetime today).

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I suggest careful review of FAB 2009-02 and 2010-01.  In many situations, it is more important to be able to exclude such contracts from 5500 reporting.  I would not advise a plan sponsor for whom this was a priority to "Sign off on distributions."  If this sign off is viewed as a "consent to eligibility for a distribution,"  no relief will be available from the  5500 reporting requirement.    This presumes, of course, that there are no post-2009 contributions or other activities with regard to these accounts.

PNJ

Patricia Neal Jensen, JD

Vice President and Nonprofit Practice Leader

|Future Plan, an Ascensus Company

21031 Ventura Blvd., 12th Floor

Woodland Hills, CA 91364

E patricia.jensen@futureplan.com

P 949-325-6727

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Well, if this is the case, then there are no pre-1/1/09 contracts that I have ever heard of. For what it is worth, I don't see how this could possibly be the case, since participants are only eligible for distributions once they are terminated. The employer would seem like a necessary component to that determination...

Austin Powers, CPA, QPA, ERPA

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Austin 3515:   This is common with TIAA and other insurance companies which historically issued individual contracts.  This is not about Non-ERISA plans.  There are many such contracts and the exemption in 2009-02 can be very valuable to a plan sponsor potentially facing a large plan filing and the accompanying audit  In FAB 2010-01, Q1, the IRS makes it clear that factual reporting, such as employment status is permitted.  What is not permitted is information which is discretionary, such as eligibility for loans, hardships or advance approval of eligibility for a distribution. 

Patricia Neal Jensen, JD

Vice President and Nonprofit Practice Leader

|Future Plan, an Ascensus Company

21031 Ventura Blvd., 12th Floor

Woodland Hills, CA 91364

E patricia.jensen@futureplan.com

P 949-325-6727

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As a non-lawyer, I find it hard to imagine that a newly appointed Fiduciary could be held liable for any Fiduciary shortcomings from a prior Fiduciary, which the current Fiduciary has no legal power or authority to change.

However, according to Mr. Bumble, "The law is a ass." I leave the fiduciary liability question to the legal cognoscenti. Way over my head.

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29 minutes ago, Belgarath said:

As a non-lawyer, I find it hard to imagine that a newly appointed Fiduciary could be held liable for any Fiduciary shortcomings from a prior Fiduciary, which the current Fiduciary has no legal power or authority to change.

I'm just guessing this will not be much consolation to my client because they will likely view their role as involving keeping the organization itself out of harms way.  somehow I surmise plaintiffs attorneys will have a hard time parsing the difference between the old CFO and the Organization itself.  After all the ORganization had a duty to monitor...

 

30 minutes ago, Belgarath said:

I leave the fiduciary liability question to the legal cognoscenti. Way over my head.

Well I mean this is the issue isn't it?  It shouldn't be over your incredibly capable head 😁.  You don't have to have a law degree to know that a 401k plan with a bum investment contract with surrender charges and "all-in" over 2% will cause fiduciary liability.  If we dont know, and we are the experts in this industry, how in the world are our clients supposed to know?

Austin Powers, CPA, QPA, ERPA

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Happy Tuesday!

I guess I'll have to respectfully agree to disagree. Seems like comparing a current 401(k) to ancient 403(b) individual annuity contracts with TIAA or Horace Mann or whoever (which WERE often the "norm" back then, rightly or wrongly) isn't a valid comparison. I DON'T know what the fiduciary liability implications might be, and if proper fiduciary oversight (such as was required in those times of yore) was observed, and if there was reasonable "prudence" in the process, etc., etc.

Do you feel comfortable that you know and can advise your clients of their fiduciary liability with regard to these ancient contracts? I certainly don't, and I'm not ashamed to admit it. How are our clients supposed to know? IMHO, it is a matter for legal counsel, particularly in these days of fiduciary prudence being litigated every which way you turn. Also, seems like advising them on what they can DO about protecting themselves against such liability (if anything) is a matter for legal counsel. Maybe I'm entirely misunderstanding what you are really saying.

P.S. Nice that you think I have a capable head, but I believe your confidence is misplaced. I'm beginning to think that after all these years, I know less than I started with...

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2 hours ago, Belgarath said:

Seems like comparing a current 401(k) to ancient 403(b) individual annuity contracts with TIAA or Horace Mann or whoever (which WERE often the "norm" back then, rightly or wrongly) isn't a valid comparison.

Well they are more similar than dissimilar.  I mean their both ERISA covered retirement plans.  I realize the answer is different.  What is amazing is the lack of guidance.  One little 2 pager would do it. 

I know, I know, careful what you wish for because odds are you won't like the guidance.  But still try convincing a social services non-profit with a tight budget to spend $1,000 for 2 hours of an attorneys time on a plan that has been used in "several" years.

Austin Powers, CPA, QPA, ERPA

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