Government plan employee group wants their share of unallocated fund transferred to 401(k) plan

[Guest DBtech]

Has anyone ever heard of a group of government employees taking their "share" of plan assets and trasferring to a defined contribution plan? In this case the group comprises 75 employees of a total of about 600 actives, but there are 300 inactive employees including 200 retireds.

The goal here is to allocate the funds in a fair and equitable manner, leaving the remaining employees in no better or worse position than those exiting the plan. The plan currently is about 90% funded on a FAS 35 basis, and about 70% funded on a plan termination basis. (The government entity does not intend to terminate the plan.)

Is it necessary to perform a full-blown ERISA 4044 allocation, or would some other method produce roughly equal results?

[david rigby]

ERISA 4044 does not apply to government plans, does it?

As often stated here, what does the plan say? Most plans, whether or not governmental, require the participant to have some "event" in order for a plan disbursement, such as termination, death, disability, or retirement. The current situation appears more like a "transfer" or "spinoff". That normally requires the governing authority to authorize the new plan and authorize the transfer. Has any of that happened? The participants don't get to make this decision.

As far as "their share", the plan's actuary should be intimately involved in this determination. Careful review of plan provisions is in order.

IMHO, a plan that is 70%-90% funded is not a good candidate for such a transaction.

[SoCalActuary]

If an employer or an employee group wants to spin-off into a separate DB plan, then the insufficient assets can be moved to the control of the new group. If that group wants to terminate an underfunded plan without guarantee that all accrued benefits are paid, then they can take the consequences. I don't see why the original plan would be allowed to directly pay 70 cents on the dollar to a terminating group of employees.

[mbozek]

The plan assets can be transferred provided that the transfer is permitted under state retirement plan laws, the plan document and any applicable collective bargaining agreements covering the plan participants. PBGC rules do not apply to govt plans. There is a legal question of why the active ees want to terminate participation in the DB plan. Most states have laws that require payment of vested benefits under public retirement plans and since states do not become bankrupt any shortfall will have to be made up by the govt. Converting to a DC plan will result in a loss of this guarantee and result in a lower benefit at retirement.