For a § 403(b) plan with “grandfathered” investments, is it unwise to provide a small-balance cash-out?

[Peter Gulia]

A nongovernmental, nonchurch higher-education employer established, and maintains, a § 403(b) plan. The plan always has provided nonelective contributions.

In the beginning, the only vendor was TIAA-CREF. Later, the plan allowed Fidelity and Vanguard. More recently, the employer discontinued contributions to anything beyond TIAA-CREF. But participants with a Fidelity or Vanguard contract may keep it.

The plan administrator’s Form 5500 report and audited financial statements for every year have consistently included the Fidelity and Vanguard amounts in reported-on plan assets.

For a plan restatement this year, someone instructed a plan-documents technician, who is not associated with me, to add a mainstream small-balance cash-out provision.

The employer/administrator has only a fraction of one employee looking in on all employee benefits, with little attention on the retirement plan. Unless they can rely on TIAA, they’ll be unable to administer the cash-out provision.

Whatever service TIAA might offer to help implement a cash-out provision, I worry that TIAA would apply it looking only to TIAA-CREF’s records, without records of account balances at Fidelity or Vanguard. If it matters, the plan now is on TIAA’s RetirePlus Pro service. Am I right to worry?

If my hunch is right, following TIAA’s cues on who gets a cash-out would result in some involuntary distributions contrary to the documents governing the plan and contrary to ERISA.

Although my scope excludes plan design, I feel I should warn my client that it’s unwise to adopt an optional plan provision if the employer/administrator is not confident about its ability to administer the provision.

Am I on the right track? Or is there some bit of legal or practical knowledge I’m missing?

[HRagain]

I would agree with you. If the internal plan administrator can't handle these, TIAA isn't going to have the access or ability or want to check balances. They might send a report to the internal admin who would be able to say yes/no to the cashouts, but I suspect this could be a very easy mistake to make.

[Peter Gulia]

HRagain, thank you.

Anyone with a different view? Or with information that might make an employer more comfortable?

[EBP]

Does the language governing small balance cashouts make it mandatory? Or does the employer have discretion to choose to do it or not? If discretionary, I don't think it's a problem. If not, this sounds operationally difficult to follow and if that's the case, I would amend the language out.

[Peter Gulia]

EBP, thank you; I had not even imagined a possibility of an involuntary distribution at the employer’s discretion.

While the IRS-preapproved documents are obtuse, the fair reading of them is that the small-balance involuntary distribution is not at the employer’s discretion.

That’s fine, because I wouldn’t advise a plan sponsor to set a plan provision that allows discretion about whether a participant is or isn’t burdened by an involuntary distribution.