Refunds on 403(b) Annuities

[Carol V. Calhoun]

Has anyone considered the issue of what to do with refunds from a 403(b) plan? The situation is that a vendor (TIAA-CREF) is recalculating its fees retroactively, and is paying the employer (a governmental entity) the excess of the fee originally paid over the fee calculated based on the new rate structure. The employer is trying to determine whether the refund can be used to pay administrative expenses of the plan (in this case, expenses of the bid process for selecting vendors), or must be allocated to employees.

The plan is a deferral-only plan. The plan document provides that deferrals are to be invested in annuities/custodial accounts as soon as administratively practicable. There is no provision for the payment of administrative expenses. And there is no provision for the receipt of any amount other than deferrals.

In theory, it seems to me that the employer should never be given the refund in the first place, because the amount is in effect a distribution from an annuity that is supposed to be owned by the employee. However, crediting employee accounts is not one of the options offered by TIAA-CREF.

However, given that the refunds are going to be made, what does the employer do now? Can it argue that using the money for the bid process is using it for the benefit of employees (because the bid process is basically about getting the best investment options for employees)? Or must it contribute the refund to the accounts of those employees in the TIAA-CREF products?

[Belgarath]

There's an interesting conundrum!

Have you posed this specific question to TIAA? How in the world do they legally justify paying this to the EMPLOYER? If excessive fees have been charged, then the annuity owners (the participants) should be getting the refunds, IMHO.

I hate to sound snarky, but it surely has the "feel" that TIAA just doesn't want to bother with the expense of properly allocating it to the participants.

But I don't have an answer, other than I don't believe paying administrative expenses is justified based upon the situation you've outline.

[QDROphile]

My first thought is the same as yours. The fees paid to the provider reduced the investment return of the account. For custodial accounts with mutual funds or their scammy insurance equivalents, that is a pretty simple concept. The investment return for some insurance products is not quite so transparent and it is possible that fees relating to the product did not identifiably reduce value or benefits. Following that thought, the refund should be used to restore the asset that was charged with the fee and the account that held the asset. A less precise approach was taken by the Department of Labor with respect to demutualization proceeds, but the sponsor did not get the demutualization proceeds directly, either. Also, demutualization proceeds typically were calculated based on many years of ownership of group insurance contracts. Associating the proceeds with the individuals who were the participants was completely impractical.