401(k) Loans Not Transferrable in Annuity Contract

[lisabroc]

We have a client who is converting their 401(k) plan from Valic that is invested in an annuity platform contract. The contract provisions do not permit loans to transfer to the new recordkeeper and instead requires the collateral to remain in a security reserve account. The loans are made by Valic to the participant and must be paid back in full in order to transfer from the security reserve account.

Has anyone dealt with this issue on 401(k) plans? It seems more common for 403(b) structures. The loans are assets of the plan and should be allowed to be transferred along with the other assets in my mind. Valic is treating them as policy loans which doesn't follow 401(k) loan procedures. Any insight is appreciated.

[401king]

We found that out about 3 months after a plan transferred from them, and the participants' loan payments were coming to "us" (the new provider). The participants received letters that their loans were about to be in default and we were dumbfounded.

It ended up with each participant having to setup, effectively, a BillPay to send a check for the loan payment consistent with the loan schedule. We repaid the participants the loan payments that had come to us.

[lisabroc]

Thanks for your comments. Valic is the only 401(k) provider that I have come across who handles loans this way. In your experience, did Valic hold back just the loan balance or did they retain additional collateral that they released after the loan was paid off?

[K2retire]

I had a case like this several years ago. They retained sufficient amount of the account balance to collateralize the loans. It was a nightmare.

[MoJo]

TIAA does this routinely (and yes, it's in their 403(b) product). Other insurance company products from the past still do that. The one I work for has some "ancient" contracts out there where the loans are in fact "policy loans" but new contracts (the past 20 years?) haven't don that. But they do still crop up. Is Valic still doing this?