ERISA Covered 403(b) Plan - Prudent Selection and Monitoring of Investments

[Guest JVH]

An ERISA covered 403(b) plan was invested in a group annuity of Company A for many years. The non-church 501© sponsor (the "Employer") exercised its fiduciay duty to select and monitor the investment options available under the plan for self-direction, and decided to move to a group annuity of Company B.

In reviewing the old group annuity contract issued by Company A, it was discovered that the Employer (as the Contract Holder) could discontinue the group annuity, BUT the contract said monies could be moved out of the group annuity to a new trust or annuity only with a Board resolution by the Employer and a written request for transfer by the participant.

Of course, a few participants have not responded or don't want to move.

To me, the contract provision of Company A really impedes the ability of the Employer to select and monitor the investment options of the plan. Any ideas how to force Company A to transfer the remaining funds to Company B?

[mbozek]

A 403(b) plan has no assets held in trust- all of the assets held in the group annuity are owned by the paarticipants. The annuity contract is a binding contract between the employer and the insurance company. If the participants refuse to approve transfer their funds I dont see how there is any liability under the prudent investor rule since the employer has no investment discretion over the funds owned by the employee.

[GBurns]

I have some problems with this scenario but will disregard them until I find out What it is that makes this an ERISA Plan?

mbozek,

If this plan has employer contributions that are subject to vesting, wouldn't there be a fiduciary duty on the part of the Plan Sponsor for those amounts? These unvested amount would not yet be owned by the participants, would they?

******

The OP stated that this is a Group Annuity contract with the PS as the "Contract Holder". I do remember some of these old contracts having such restrictive provisions but since the Board Resolution is simple, the only problem is getting participant agreement. But I suggest a re-read of that contract provision to ensure that it is there and that is what it really says.

In the Group contracts that I remember, it was really the Certificate Holder (plan participant) who dictated any change. However, none of these were ERISA because of employer contribution, but because of control and selection of vendors etc. If there is an unvested employer contribution, then there could be a difference.

Since this is an old plan it is very likely that some participants have not responded simply because they have not received the request because of address etc changes or simply because the explanation sent was not understood. Have you identified the reasons for no response etc?

[mbozek]

IRC 403(b)(1)© provides that amounts contributed under 403(b) must be nonforfeitable. Need to look at contract to see who has the right to invest amounts that are not vested, if there are such amounts.

[Guest getaxa]

403(b)s and the ERISA bonding requirement, as I understand it, the plan sponsor must have a bond equal to 10% of the plan assets. If there are no assets, 10% of nothing is nothing so does the plan sponsor (non-governmental 501©(3)) need this bonding requirement? Thanks for info!

[Guest JVH]

The reference to a "trust" was for transfers "out" of the first group annuity placed with Company A. Clearly, the assets in this case are held in a single group annuity and not a trust. However, the source of the assets are both employer matching contributions and employee salary deferrals. Thus, this is an ERISA covered plan, and the employer has the ERISA duty to select, monitor, retain and replace the investment options made available for self direction.

From the contracts I have seen, with a non-ERISA plans (limited employer involvement and no employer contributions), there are individual annuities and annuity applications that are in the name of and signed by the Employee.

Here, there is a one group annuity signed only by the Employer and the Employer/sponsor is given powers similar to a 401(k) plan. Employees can self direct among funds selected and monitored by the employer, and the employees have this apparent veto right on monies being transferred out.

Mbozek, I don't see why you say the funds are "owned" by the participants. The applicant and the contractholder are the employer. The only certificate the employee gets is a statement of benefits under the 403(b) plan. These employees seem to have rights similar to a fully vested participant in a 401(k) plan. In both case (here and a 401(k) plan), I believe the employer has a duty to select and monitor. I would hope the answer is that if the employer decides to leave company A's annuity and an employee refuses to sign off, that the duty to monitor has been satisfied.

[mbozek]

In a 403b anuity there is no ownership of plan assets by a trust. The Ins co holds the assets for the employee under the terms of the contract. Under state ins law each employee receives a certificate of insurabily under the contract which provides their rights to benefits under the contract. The employer does not own the assets in the contract. The Employer has a fiduciary duty to select invesmtents but cant force the employee to transfer funds to the new insurer if the contract reserves such right to the employee. If plan fids cannot move assets w/out participant's consent I dont see how they have investment descretion over assets under ERISA any more than they would be liable for investment results under 404©.

[GBurns]

You posted that "The only certificate the employee gets is a statement of benefits under the 403(b) plan."

The employee must have signed an insurance application and must have been issued a Cerificate of Coverage or Certificate of Insurance (I doubt that any other names are allowed). It does not matter that it was an employer sponsored Group Annuity.

Because there seems to be some discrepancy as to what the employees received there should also be a discrepancy as to what really exists, I again suggest that you look at the actual contracts to ensure that the restrictions are really there in that manner.