How Do You Terminate a 401(k) Plan?

[IRA]

Our client has a 401(k) with a GIC. They want to terminate the plan. How do you terminate and distribute with the GIC held in the 401(k)? Any ideas, comments, experiences, suggestions, traps for the unwary?

[K2retire]

Have them start by asking that question of the person or firm who wrote the 401(k) plan document for them.

[austin3515]

The sad truth is you really can't terminate, or at least you probably shouldn't. I have an old MP plan that we're not terminating for one reason - the surrender charges are obnoxious. And since it's one contract, you can't divvy it up in IRA's. So you either pay the surrender charge, or keep going.

IT would be inteesting to know if you could "terminate" the plan, allowing peoipl to close out everything other than the GIC. My plan had only the GIC in it...

[david rigby]

.. the GIC held in the 401(k) ...

Likely, the k-plan has an interest in the GIC, rather than vice versa. Review the GIC contract to determine what, if any, surrender charges apply.

A more interesting question might be why the sponsor wants to terminate the plan. Readers of these Message Boards have noticed several claims of a sponsor seeking to terminate the plan when the underlying reason was dissatisfaction with investment results or administrative procedures. Curing the problem(s) can often be done without plan termination.

[Bird]

Not exactly on point, but for anyone who doesn't know, paying surrender charges is generally no worse, maybe better, than keeping something around waiting for surrender charges to expire. GICs aren't as transparent so I'll use B shares as an example. The surrender charge in year 2 is typically 4%. The additional annual expense for B shares is typically .75%. The surrender charges typically go to 0 after 6 years. 5 years of higher annual expenses @ .75% = 3.75%, just about the same as the 4% paid at once.

It all depends, and GICs are a different animal, but generally speaking, the net cash surrender value after surrender charges is generally the best indicator of a contract's "true" value - that is, it's not like there is any extraordinary value being added just by holding on to something long enough to avoid surrender charges.

[RCK]

In a former life, I worked for an insurance company that wrote GIC's, and I worked on pricing for the 'surrender charges' for that contract.

So: a GIC is first of all a Guaranteed Investment Contract--therefore a contract and that contract will have language about how the surrender charge is calculated. In theory, it is designed to do two things--first to help the issuer recapture unamortized expenses (they planned to do it over say 5 years, and that is what you agreed to, but now you've changed your mind), and second to let them recover possible market value losses. That is, they bought a 5 year bond that they were matching up to their committment to you, and if they have to sell that (say) 5% bond into a 7% market, they are going to suffer a slight loss.

But if interest rates have moved down over the term of the contract, the bond that that they bought is now worth more than they owe you, and that portion of the calculation should be positive.

Disclaimer: this is all a simplistic overview of a complicated deal, and somewhat dated. But the bottom line remains the same--its a contract, and you need to check the terms of the contract. And you will probably need to contact the issuer for a calculation of the charge.