Custodial Agreement Required?

[BTG]

Is there a requirement that an employer must actually have a custodial agreement in place with the custodian in order to have a custodial account under 403(b)(7)? Common sense would suggest that it is required - i.e., how can you have a custodian without a custodial agreement? However, we are hearing from a client that at least one provider purports to offer a custodial account without such an agreement. The definition of "custodial account" in the final regs (1.403(b)-8(d)(2)) does not appear to address the issue. Any thoughts?

[Appleby]

Maybe they are thinking about another agreement.

A custodial account must be opened under the custodian’s custodial agreement. But that agreement is between the participant and the custodian.

They may be thinking of the Information Sharing Agreement, which is between the custodian and the employer. The Information Sharing agreement is not required in all cases.

[GBurns]

I am not up to date on current practices, so this is my recollection circa 2000.

Almost every 403(b) product that i saw was a Group Annuity and I recall that some of the major 403(b)(7) mutual funds were a sort of pooled or group account, especially if there was an employer contribution. I recall those mutual funds because of how the sales charge (and 12b-1 fees etc) was structured based on investment volume.

In the employer documentation there was an employer agreement of some sort, an agreement regarding payroll deductions etc, an Adoption agreement and a Hold Harmless.

I think that the employer agreement included such language as to make it a custodial agreement. In any case, since they were group products, the employer would have had to be the account/policy holder and therefore a party to the custodial agreement.

[Appleby]

Interesting and good to know. I was not aware of that, as I have never seen those documents. I have seen custodial 403(b)(7) accounts. In all the cases I have seen , the participant establishes the agreement with the custodian- and usually funds it with a 90-24 transfer. Often, the employer is not even aware that the account is held with the custodian...unless they remit salary deferral or other 403(b) contributions to the account.

[GBurns]

Do a Google search on the term "403(b)(7) Group Custodial" and you should get an idea of how prevalent such an agreement is.