Non-Erisa 403(b) Plan

[Guest jc1457]

This is a private school that sponsors a non-Erisa 403(b) Plan. Plan has been working well until 2009. Unexpectedly (according to the client), the investment company stopped receiving contributions. This was temporary at first and the explanation given was that the accounts needed to be switched over to a new recording system. Well 30 days worked it's way into 60 then 90. NOw as of May 1st the investment company says that they cannot handle 403(b)s anymore. I am hearing this from our client - so I'm not sure what kind of warning was given. Also, there has been turnover at the investment company and so our client had to deal with a switch in contacts.

The client has been withholding but now wants to refund all deferrals that were not deposited (from 1/1/09 - 4/30/09). What would you advise? He also is thinking that instead of returning deferrals, opening a money market account in the name of the 403(b) plan and depositing all deferrals into the plan's money market account until this mess is figured out. At this point, a new investment house is needed and the client is not sure how quickly this can be done.

Thanks for any help.

[Guest TPADoug]

It’s not totally unheard for this kind of thing to happen with the new regs being implemented. Many vendors who worked in the 403(b) marketplace did so as an after thought, or as a loss leader to help push other products they may offer. There have been many companies who cannot or will not share information with other vendors. Some will not pay fees for TPA services and will opt out of a plan or plans. Some will only agree if they are the single product solution for the employer. So this kind of action isn’t uncommon. However your client needs to consider a few things.

I WOULD NOT recommend putting plan assets into a money market. First, these are 403(b)’s. While they have to conform to the plan, they are still individual investments held by the respective participants. My guess is that whatever plan doc they are using does not show a random money market as an approved investment option. Also, they don’t want the fiduciary responsibility of taking collective receipt of those funds. Nor should they, under any circumstance, move money to an investment that has not been signed off on by the individual participant. That is a can of worms you just don’t want to open.

Due to the tax differed status, the correct, safe way to handle this would be to tax and distribute the contributions back to the participants. It might be a pain administratively, but its the only truly safe option that insulates them from potential pitfalls.

As for future contributions, I’d have them discuss what investment options make sense for their people, check some products out (considering things such as age of the participants, amounts they are withholding, etc.) and amend their plan document to allow for the vendor(s) to be approved in the plan. Have open enrolment and get some educational resources from the product providers to help ease the transition and show the benefit to their participants.

Just my 2 cents