Terminating a Group Tax Sheltered Annuity Contract

[Guest PB&J]

An employer who sponsors an ERISA 403(b) plan would like to discontinue its current Group Tax Sheltered Annuity contract with its current carrier. When the employer discussed the idea with the rep, the employer was told that if it terminated the contract it would be liable for the exit fees, which are estimated to be quite substantial. However, this is not a situation of just wanting to switch to a new carrier but rather there are performance issues involved and the employer is unhappy with the service of the current carrier. Is there any way to transfer employee balances to a new carrier without the exit fees? Is there any way to avoid these exit fees? Any guidance would be greatly appreciated. Thanks!

[WDIK]

If the assets are significant enough, would a new carrier be willing to negotiate maintenance, management or account opening fees to help offset the exit fees?

[Guest Herbert Hussey]

Here are three choices:

1. Contact the vendor directly and request another seriving agent if you feel that the problem is predominately a servicing issue. Performance is often tied to lack of effective servicing of the account participants. If it is a Vairable Annuity contract that is in place, or mutual funds, you may take the position that as the Plan Sponsor you have the right to determine who services the account. Many vendors may agree with you and permit you to select another servicing agent.

2. Find another vendor willing to buy out the business to lessen the surrender charges. Please know this-I have not seen this actually work. Be careful of vendors that promise that they can move your people if they are permitted to use "bonus" annuities (annuities with increased interest rates for the first year, etc) as this may involve tying your participant's funds for much longer time than in using a non-bonus annuity. If you wish to pursue this option, please contact the vendor directly, and think carefully about any buy-out option.

3. If your 403B is a participant-controlled plan, you may wish to review each participant's account separately to determine what to do about moving the account. It is possible that some participant's accounts are nearing the end of surrender charge period, while others may have many years to go. This approach may take quite a bit of work, but it assures your participants that their interests are being considered before any action is taken I have seen this approach work well. It takes effort and time, but, actually, what you learn about each account will LEAD you to your best option.

Good Luck,

Herbert Hussey