403b Contract Transfer

[Guest Pension250]

I have a client who has a 403b contract with company A. They have gotten on the "fiduciary bandwagon" and have been reviewing fees with their current provider, and have decided to move assets to a lower cost provider (company B) because they have decided that company A is not in the best interest of participants.

New money has begun to deposit into company B. The plan sponsor wants to transfer the accounts in company A over to company B. However, the accounts are individual annuities and require paperwork from every participant.

Company A has now started communicating directly with participants, advising them of their right to keep the money where it is.

The plan sponsor truly is trying to do the right thing, but they are wondering how they can possibly "force" employees to move since the accounts require individual participant signatures. A small group of employees has been swayed by Company A, and has started to complain about moving to Company B. The concern is that they will "refuse to sign".

The issue with keeping money in 2 places is due to the additional burden of administrative costs. To make matters worse, the company cannot afford to pay the administrative fees, and Company A will not pull administrative fees from individual contracts.

I know there have been attorneys who have fought (and won) to have surrender penalties or MVAs waived in instances such as this. However, was wondering if anyone has heard of a plan sponsor "winning" the battle to be able to direct these accounts be liquidated without participant signature, using plan sponsor signatures instead to direct plan assets?

I am representing neither Company A nor Company B...just trying to help the client. Seems a shame they are trying to do whats best but having issues with paperwork/signatures....this is a nice company with well-intentioned management.

Thanks!

[TLGeer]

I have a client who has a 403b contract with company A. They have gotten on the "fiduciary bandwagon" and have been reviewing fees with their current provider, and have decided to move assets to a lower cost provider (company B) because they have decided that company A is not in the best interest of participants.

New money has begun to deposit into company B. The plan sponsor wants to transfer the accounts in company A over to company B. However, the accounts are individual annuities and require paperwork from every participant.

Company A has now started communicating directly with participants, advising them of their right to keep the money where it is.

The plan sponsor truly is trying to do the right thing, but they are wondering how they can possibly "force" employees to move since the accounts require individual participant signatures. A small group of employees has been swayed by Company A, and has started to complain about moving to Company B. The concern is that they will "refuse to sign".

The issue with keeping money in 2 places is due to the additional burden of administrative costs. To make matters worse, the company cannot afford to pay the administrative fees, and Company A will not pull administrative fees from individual contracts.

I know there have been attorneys who have fought (and won) to have surrender penalties or MVAs waived in instances such as this. However, was wondering if anyone has heard of a plan sponsor "winning" the battle to be able to direct these accounts be liquidated without participant signature, using plan sponsor signatures instead to direct plan assets?

I am representing neither Company A nor Company B...just trying to help the client. Seems a shame they are trying to do whats best but having issues with paperwork/signatures....this is a nice company with well-intentioned management.

Thanks!

I am not entirely clear whether your issue is solely the inability to force Company A out or th possibility of contract hits as money is moved. I am going to assume the first issue.

You are encountering one of the basic flaws in the 403(b) regulatory/market structures. The single core issue that prevents a more 401(k)-like structure for 403(b) plans is the dominance of the individual annuity in the marketplace.

Technically, your employer is stuck with allowing participants to keep their Company A annuities. They are individual annuities and, while there is no reason the annuity contract cannot give the sponsor or the plan the ability to terminate the annuities, in fact the contract will allocate that power to the annuitant. However, absent money issues, the plan/sponsor should have someone review the actual language of each policy form applicable to annuities issued under the plan, to make sure and to try to find any workarounds that the policy form may contain. It is often true, in dealing with annuities, that there are devils and angels in the details.

Absent any luck there, the employer is stuck. The plan can cut off future contributions and/or prevent transfers within the plan to Company A, but not force the money out.

Now, the fact that Company A won’t take expense money out of the Company A annuities is not the end of that issue. The plan can, if the plan document permits, allocate expenses in any reasonable, nondiscriminatory fashion, without regard to whether or not the insurers/vendors will comply. Most plan documents cover these cost issues sketchily, if at all.

Suppose, for example, the Company A fans were not allowed to continue contributing to Company A annuities and the plan’s terms divvied up the cost of dealing with Company A on a per-person basis. The employer/plan could refuse to transmit information needed to allow loans or distributions to be made without a direction from the participant to Company A to pay accumulated costs.

Now suppose the plan allows contributions to Company A. The plan then has salary reductions or employer contributions available as a source for payment of costs, and can withhold them before transmitting a net amount to Company A. There are possible issues under the plan asset regulations here, as well as their counterparts in the 403(b) regulations, but these problems are solvable.

Neither of these is a perfect answer, and particularly not the first.

I have caveats for you. First, the plan document has to authorize the concept of forcing participants out of Company A annuities; my experience is that 403(b) plan documents generally focus very little on the non-tax issues associated with investment transfers. Second, contract hits are a very important issue even as to participants who want to move from Company A to Company B, and likely would be the source of claims from Company A fans if they were forced to move. How these issues would play out depends, at least in part, on (1) the terms of the annuities themselves (e.g., can the participant avoid hits by taking installments?), (2) the terms of the plan document and its history, (Does the plan say that hits are participant responsibilities, based on the theory that the participant chose the annuity? Were there other choices available?) and (3) whether the plan is subject to ERISA or state law. Last, the plan document is likely to be deficient in one of the three areas mentioned above, control over funding vehicles, coverage of the mechanics of transfers between and among funding vehicle and treatment of expenses and contract hits, and amendments as to one or all are likely needed.

Usually, these situations involve a detailed analysis stage, where possibilities and risks are articulated and evaluated, followed by a decision to choose one or more alternatives based on risk and cost factors. This is not a simple task. Good luck

Tom Geer

P.S, I have gotten waivers of various contract hits and restrictions in the past, but only in the context of group annuities and only where I had some legal theory to push at the insurers. Insurers are far less likely to discuss the possibility for individual annuities. Planned phased contract terminations are easier to get done.

[Guest Pension250]

Thank you very much for taking the time to respond!

[Guest Pension1]

Thank you for having the exact same issue as me! I've had my head buried in IRS regs for the last two days, and still can't find any answers.

Does anyone have any thoughts on terminated participants? I recently took over a 403B (which IS subject to ERISA) Plan who has over 100 individual annuity contracts under a Group Plan with, say, vendor C. They have convinced many of their employees to move to vendor D, and are remitting all new contributions to vendor D.

My question is regarding terminated participants whose assets are at Vendor C. What do we do if we can never locate them? Just keep the Plan at two vendors indefinitely? Can we roll over accounts of participants with vested bals of less than $5000, just like we would a 401K Plan?