Single Plan, Multiple TDAs?

[Christine Roberts]

Private not-for-profit employer with a non-ERISA 403(B) arrangement wants to add employer matching and discretionary contributions, and thus needs ERISA plan document.

But, employer wants new contributions to go to existing TDAs. I.e., no group annuity contract or other group investment account for the plan.

Is this kosher? When it comes to defining distribution, loan, and hardship withdrawal terms for the plan, should it not simply defer to the language of the applicable TDA?

And what about Form 5500 reporting? If the employer hires an employee with an existing TDA balance of $30,000 from prior employment, and begins contributing to this TDA under the plan, does the employee's entire balance count for purposes of the plan's Form 5500 reporting, or does the employee get a zero balance upon joining the employer?

Any and all comments are welcome.

[Carol V. Calhoun]

There are definitely a lot of ERISA 403(B) plans out there using individual TDA contracts. Typically, the contracts themselves will define things like distribution, hardship withdrawal and loan rights. However, it then becomes a question of how much you trust the product issuer to be complying not only with the IRS requirements for 403(B) status, but also thosee ERISA requirements that have to be imposed at the level of the individual investments.

Also, it has always been unclear to me just how the fiduciary requirements operate in the context of a 403(B) plan, since the contract must be owned by the employee. Should we assume for Form 5500 purposes that the plan never holds any assets, because the contracts are in effect being distributed to employees immediately on their purchase? How can a fiduciary ever engage in prudent fund management if the contract is owned by the employee? What happens if, as is often the case, one employer contributes to a TDA started by a prior employer? Some have suggested that in the context of a 403(B) plan, fiduciary duties should apply only to the original purchase. However, the whole subject is pretty murky.

[QDROphile]

Add QDRO administration to your list of imponderables. The ERISA fiduciary has the QDRO responsibility, but no real ability to make sure that administration is carried out properly.

[Christine Roberts]

These are helpful replies. Thank you.

One issue that I did not originally mention is ERISA Section 404© compliance. One thought would be to notify each TDA issuer, in writing, of the inception of an ERISA plan, and request that the issuer explain, also in writing, what its procedures are for notifying account holders of investment information (e.g., forwarding mutual fund prospectuses (sp?)), its timing in executing investment changes, and the like.

Of course if the account issuers do not respond, or respond in a way that indicates they cannot keep up with 404©'s complicated compliance scheme, then the employer must make other arrangements (through a TPA, perhaps?) for 404© fulfillment.

Any comments??

[Carol V. Calhoun]

As a practical matter, I always urge even non-ERISA 403(B) plans to try to comply with ERISA section 404© to the extent possible. This is because the exemption from ERISA in ERISA Reg. § 2510.3-2(f) for section 403(B) plans applies only if employer involvement is limited to certain specified actions, including "limiting the funding media or products available to employees, or the annuity contractors who may approach employees, to a number and selection which is designed to afford employees a reasonable choice in light of all relevant circumstances." In the absence of much specificity in the regulation as to what a "reasonable choice" is, the conservative course would be to try to come up with a choice of investments that would meet the 404© guidelines if they applied.