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MVA during a 401k termination


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Hola,

I am working with a small 401k that is terminating due to a buyout. The existing 401k plan has a stable value fund, which is now triggering a Market Value Adjustment. I have reached out to the fund requesting information on a put option, but since the plan is terminating, I am not sure that even if the put is allowed.

Date of termination hasn't yet been established - but the assets generally must be distributed within a year of the date. I'm concerned that the put option (if available) might be more than 12 months.

Any guidance would be appreciated!

 

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Is this participant directed and can participants move out without penalty? If yes you may have success in explaning that their funds will be hit with an MVA of X if they do not move to a different investment option, without actually giving investment advice. If it is small and all the participants can be located that may or may not be an attractive option to complete prior to submitting any termination paperwork to the custodian.

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Since we have already spoken to the recordkeeper, if significant assets are transferred out of the stable value fund they will trigger the MVA.

My main question is regarding date of termination. the participants themselves might be fine staying in the fund with a step-down or put option, but if the termination must occur within X months, but the Put is a longer time frame, this might not be permitted.

 

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I believe there is some internal threshold for the stable value funds.  If the threshold is exceed then the MVA is triggered.  The threshold is evaluated over 12-months rolling period to prevent from staggering.  I am aware of at least one player for whom the threshold is 25%.   All of that probably (or should be) outlined in details of the Service Agreement with the recordkeeper.

Overall, it is a very big issue right now and should be planned for ahead of time especially when considering plan termination.  There are definitely some interesting consulting opportunities out there right now.

 

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History may not repeat itself exactly, but it can be analogous. 

The issues here are very similar to those faced by plans in the early 1980s when insurance companies offered 5-year or more GICs with guaranteed rates of return of 12% or more.  Then the markets turned, new GIC rates dropped, some insurance companies failed, and MVAs were horrendous.  This stable value fund likely is dealing with the impact of interest rate hikes on the value of the underlying fixed-rate investments.

When addressing the issues, the starting point is the terms of the agreement with the stable value fund.  As others have noted, is the fund benefit responsive as Lou asks above (can participants direct a transfer out of the stable value fund)?  If so, typically there is no MVA applicable to the participant-directed transfer although some may have a trigger if transfers in the aggregate exceed a specified level such as the example truphao mentioned above.

If the stable value is not benefit responsive and the plan is closing out the fund prematurely, then the MVA will apply.  Sometimes this is a positive outcome for participants but this instance looks like it is a significant negative.

In addressing the past GIC issue, some plan sponsors negotiated with the fund a buy-out of the MVA.  Other plan sponsors, where participation in the GICs was very popular among participants, made a higher company contribution to help take the sting out of the MVA. 

Some plans that wanted to terminate but could not afford the MVA, froze the plan, allowed for distributions from the other investment options, and kept the GIC open to preserve the high guaranteed return (assuming the contract issuer did not go belly up).  This had the overhead expense of running the plan for two or three years or until the markets shifted and the other strategies for addressing the MVA became affordable.

Many plan sponsors' approach to the GIC issue was to acknowledge it was what it was, participants had a good ride on the upside, the choice of the investment at the time the choice was made followed the plan's investment policy, and everybody was happy until they were not happy.  

Good luck!

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All of that probably (or should be) outlined in details of the Service Agreement with the recordkeeper.

They are slow to respond but we are 100% sure that if the plan is terminated in this manner there will be an MVA. We know to the penny what it will be, and there's no way to avoid that.

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(can participants direct a transfer out of the stable value fund)?

Since we have already spoken to the fund about this, the fund has the right to do a lookback and charge an MVA if there are significant withdrawals from participants. We are unsure if in that situation it will effect the participants themselves or the plan directly and are awaiting a response from the recordkeeper.

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Some plans that wanted to terminate but could not afford the MVA, froze the plan, allowed for distributions from the other investment options, and kept the GIC open to preserve the high guaranteed return (assuming the contract issuer did not go belly up).  This had the overhead expense of running the plan for two or three years or until the markets shifted and the other strategies for addressing the MVA became affordable.

This is our intention, but again as in my first two comments of this thread, We can't tell if we have the option to freeze the plan in this situation, and we can't find guidance on freezing a plan for an extended time frame (who submits the 5500, for example).

Perhaps a better way to phrase this thread is "how can a plan be frozen and administered for an extended timeframe after a buyout?" and the MVA is just the primary reason for doing so.

 

thank you all for your comments and I would appreciate more if you can!

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The path forward will depend in part on the nature of the buyout.  If it is a stock sale, then this business will cease to exist and the new owner automatically will become the plan sponsor.  If it is an asset sale, then this business will continue to exist and can continue to be the plan sponsor until the business is formally shut down.

The plan document says who is the Plan Administrator.  If, as is common, the plan sponsor is designated as the Plan Administrator, then the path forward above will determine who is the PA (unless there is an amendment to the plan naming someone else as the PA).

The PA will be responsible administering the plan until it terminates and all assets are distributed.

The plan can be frozen pretty much anytime and can remain frozen through the plan termination.

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Remember a freeze is not a termination so the restriction on in-service distribution of certain pre-59 1/2 distributions for active employees will still apply. But yes you could freeze the plan instead of terminating it. But that might bring up some unintended consequences so make sure you understand the implications.

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Good point, Lou.  If a participant is terminated, then they would have a distributable event.  Otherwise, the plan should provide for a trustee-to-trustee transfer for participants with balances in the frozen plan who do not have distributable event and who are participating in the buyers plan (if that plan is willing to accept the transfer).

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