Changing 403(b) custodians

[Guest medinael]

We represent a nonprofit that has operated a 403(b) plan since 1987. A major brokerage house is custodian and offers mutual fund investment options. The nonprofit makes employer contributions and the plan is an ERISA plan. The nonprofit has never been able to obtain plan level information from the custodian, such as number of participants remaining in the plan, etc. The custodian indicates records are not kept on a plan level basis and they are not able to determine how many of the individual participant accounts are part of the nonprofit's 403(b) plan. Is this normal? The nonprofit would like to switch to a new custodian. How can this be accomplished when the custodian does not keep records on a plan level basis? The nonprofit can account for the current employees that it knows are participating, but it does not know what happened to the accounts of numerous employees who have terminated employment since 1987. Are those former employees left behind with the old custodian? Help!

[E as in ERISA]

The only time I've seen the employer-level reporting you're talking about was when a group annuity was used.

[Guest LVanSteeter]

If the firm can create plan level reports for qualified plans, why wouldn't they be able to do so for 403b plans?

The company I work for can and does create year end reports for both. Of course, some of the information is only as good as the information the plan provides (i.e. employment status of participants)

[Guest medinael]

If plan level reporting is not the norm, how are custodian changes usually accomplished? Are all participants required to do individual 90-24 changes? How is the employer supposed to identify and notify former employees that they are changing trustees? Or, am I thinking of a 403(b) "plan" wrong - does it matter if each of the individual participants keeps their funds with different custodians?

[mbozek]

There are two characteristics of 403(b) plans that are relavent: 1. assets in a 403(b) plan are not held in a trust and asset information is not reported on a 5500. 2. Plans may use individual custodial accounts or annuities so that involvement of the plan sponsor is limited to determining eligibility and making the contributions. Most brokerage houses have custodial accounts under 403(b) between the participant and the brokerage where an individual broker is the registered representative of the participant. The brokerage does not keep records on an employer level because the only records are kept by each participant's broker. The employer could replace this arrangement with a new plan for amounts contributed after the effective date by designating a new mutual fund or annuity company for plan contributions. The employer needs to retain counsel to review the applicable documents a determine how a new plan can be established.

[Locust]

Until the 1980s most TSAs were individual products basically set up on a retail basis with the brokerage houses. There was no need for plan level reporting because there were no discrimination requirements, and basically the only plan sponsor responsibility was to make the contributions to an approved vehicle (insurance or custodial account). The employer wasn't even responsible for the tax treatment of the contributions - this was the responsibility of the individual employee. (In fact the only way the IRS was able to get the employer on the hook for the taxability of 403(b)s was to go after employment taxes and withholding obligations that would apply if the arrangements were not eligible under 403(b)).

IMHO a retail type of arrangement doesn't make much sense these days for a 403(b) arrangement of any size because - 1. the fees are probably high, 2. you have no idea what is going on with the individual accounts, and 3. you have no idea how payments from the accounts are being made.

I have heard of an arrangement in which the broker (actually an insurance guy who had a link to a brokerage house) worked with about 200 employees' accounts for more than 20 years. The broker met with each employee and handled investments and payments. The employees had invested in 100's of mutual funds. The fees on the mutual funds were all over the place - front and back loads, shareholder servicing fees, payment fees, asset fees - because of the number of funds and the lack of plan level reporting, there was no way to determine what the overall fees were. The broker wouldn't document or even estimate his commissions and shareholder servicing fees. My guess is that his commissions and the overall plan expenses were very high.

There is a fiduciary issue here in that if the employer chooses the broker, it may have some responsibility to monitor the fees and the funds that are available to employees. In the situation described above the broker argued that there wasn't any risk for the employer on the choice of funds because employees had hundreds of funds to choose from, and he made a similar argument on the fees, in that he claimed that all fees were fully disclosed.

These arrangements can be firmly entrenched -- good luck.