Prohibiting "Vendor Jumping" During Plan Year

[Christine Roberts]

May a 403(B) arrangement that makes a variety of annuity fund and custodial account providers available to employees, prohibit employees from switching deferrals from one annuity provider to another, in the course of the plan year? (I.e., stopping deferrals to original provider and making new deferrals to different provider.)

Does it make a difference if the plan is subject to ERISA?

[Carol V. Calhoun]

This is bizarre! I saw several responses up to this post, but they have now disappeared.

In any event, I think the primary point that was made was that you have to look at the overall situation. If the only way to change investments is to jump vendors, you would probably want to allow people to change more than once a year if the plan is maintained by an ERISA-covered employer, for the following reasons: If the plan is intended to qualify for the exemption from ERISA for salary-reduction-only plans, you have to offer a reasonable choice of investments, and the DOL might look to ERISA section 404© regulations by analogy in determining what was reasonable. If the plan is actually subject to ERISA, ERISA section 404© would apply directly. And ERISA section 404© generally assumes that an employee must have at least a quarterly option to change investments (or more often in the case of more volatile investments).

In the case of a governmental employer, you would want to look at applicable state or local law. However, many state courts have looked to ERISA-type standards in applying state and local law, if local law does not provide more specific standards.

The situation is different if an employee has a reasonable variety of choices from each vendor. In that case, frequent options to change vendors might not be necessary. However, you would still want to make sure that there was some procedure for changing vendors if a particular vendor's products became imprudent, e.g., due to changes in the vendor's financial situation.