Possible bankruptcy of provider?

[mariemonroe]

401(k) Plan utilizes a popular Retirement Plan Service Provider. Retirement Plan Service Provider is a subsidiary of Big Time Insurer. Big Time Insurer isn't doing too well and may file for Bankruptcy (though financial analysts seem to think Big Time Insurer is too big to fail - a la Bearn Stearns).

Should participants in Plan be worried?

Could Big Time Insurer's bankruptcy have any effect on Plan participants' accounts?

Should Plan Fiduciaries think about changing providers?

[Guest Sieve]

If Service Provider is just providing recordkeeping and compliance (TPA) services, then the potential bankruptcy of Insurer should not have a direct impact on the investments (which would, based on my facts, be held elsewhere by a different custodian). If the plan's investments are, in fact, held by the Service Provider or by the Insurer, I would hope that the potential bankruptcy will not impact those investments--which it shouldn't--but you can never tell, especially if the investments are proprietary. Should the fiduciary move to another service provider? That's a fiduciary decision, to be based on all available information (which clearly we, and perhaps you, don't yet have). It certainly should be a consideration--and it likely would be a breach of fiduciary duty if there were not, at least, some due consideration and due dilligence given to the issue.

[GBurns]

What does Big Insurer"s bankruptcy have to do with the continued viability and operation of the subsidiary ?

The bankruptcy of a parent does not necessarily affect the subsidiary.

Enron sold PGE and CCE while in bankruptcy. Last I looked both were still doing fine.

[K2retire]

While the possible bankruptcy may or may not ever occur, and may or may not impact the plan's investments, I believe a prudent fiduciary would be well advised to consider what could happen in each of those possible scenarios. If the assets can be moved without incurring large surrender fees (such as those charged by many insurance related investments) it is worth considering. On the other hand, if there are surrender charges, that certain expense must be weighed against the unknown other possibilities.

[Kevin C]

If some or all of the plan investments are held in insurance products of the Big Time Insurer, there may or may not be reason for concern. You would need to get independent advice from someone who understands how those products work to tell for sure.

We had a client years ago that had a GIC as part of the assets of their DB plan. The insurance company who issued the GIC filed for bankruptcy. Withdrawals from the GIC were temporarily suspended and the GIC went into a court ordered reorganization plan. When they were later allowed to remove funds from the GIC, it was worth a fraction of the former value. Over time, the value rose significantly and eventually the Trustees decided to cash out. The whole process took several years.

[mariemonroe]

Thanks everyone.

[GBurns]

My answers t o your questions:

Should participants in Plan be worried?

No, but concerned Yes. They should find out and evaluate the investments held.

Could Big Time Insurer's bankruptcy have any effect on Plan participants' accounts?

It depends on what the investments are. See post by Kevin C.

Should Plan Fiduciaries think about changing providers?

That depends on the facts discovered.