Unilateral transfer of 403(b) accounts to new vendor by sponsor.

[Guest andmik]

I am struggling with this one. 403(B) Plan Sponsor wants to change 403(B) providers. I understand that they can limit the custodian they will send contributions to on a going forward basis. My question is whether they can unilaterally move participant custodial accounts from the current vendor to the newly selected vendor or do they require participant direction?

Any insight or references will be appreciated.

Thanks,

Andmik

[MWeddell]

The answer to your question is not very clear, but I think it depends on whether the old money was contributed under an ERISA plan or a non-ERISA arrangement. If it was an ERISA plan all along, then the employer is a fiduciary and has not just the right but also the responsibility to change fund managers when it considers it prudent to do so. If it was a non-ERISA arrangement, then the employer was only facillitating a relationship between the participant and the contract issuer and has no authority to change the investments without the participant's consent.

[Guest andmik]

MWeddell -- Thanks for your quick and informative response. I want to get one clarification based on your response. If it is an ERISA 403(b)plan, you are indicating that the Employer can pick up all the participant accounts and move them to new fund manager without prior consent due to fiduciary responsibilities?

Thanks, Andmik

[MWeddell]

Well, I wouldn't call them "participant accounts" necessarily, but I'll answer yes to your question.

If it's an employer-provided plan that is covered by ERISA, the employer is the one with the responsibility to prudently select providers including investment funds. If the employer has the responsibility, then one has to give the employer the power to change investment providers too.

[Carol V. Calhoun]

I think that there may actually be an issue here, even with respect to ERISA-covered plans. Typically, the employee actually owns a 403(B) contract once it is purchased. Indeed, in many instances an employee will have a single contract, to which contributions are made by various employers over time. Thus, the employer may not have any contractual right to move money around among investments specified in the contract, or to cash in the contract and move the money elsewhere. Indeed, some of the money in the contract may have come from different employers. Under your theory, would each of the employers be responsible for redirecting the investments of the contract attributable to that employer's contribution?

This is quite different from a trusteed plan, in which the trustee owns all the investments for the benefit of the participants, and therefore can move money from one to another. This would seem to be more comparable to a SEP-IRA type of plan (in which the employer contributes money to the employees' IRAs, but the employees own the IRAs and are responsible for directing the investments of the IRA after the money is contributed) than to a trusteed qualified plan.

Although I would agree that the employer has fiduciary duties with respect to the initial investment of ERISA-covered 403(B) money, I am not sure that the employer has a continuing duty (or indeed, a continuing right to make changes) after that.

[MWeddell]

I'll start by repeating the disclaimer at the beginning of my first post: "the answer to your question is not very clear." Nonetheless, I disagree with Carol Calhoun's post. It's unfortunate that such a key issue is left unclear, that none of us can give a definitive cite to firmly answer the issue.

Carol seems to be saying that because a 403(B) plan does not have a trustee, then she is not sure that the employer has continuing ERISA fiduciary duties after the initial investment is made. I find no hint in ERISA 404(a) that an employer ceases to have a continuing fiduciary duty depending on whether there is a trustee or not. On the contrary, DOL regulations regarding IRAs and a partial Congressional exception for simple plans in ERISA 404©(2) leads me to think that not having a trustee does not relieve one of ongoing fiduciary liability. Situations where individual annuity contracts are distributed to participants strike me as distinguishable.

Note that many small 401(k) plans are invested in annuity contracts with no trustees. It's quite common for plan sponsors to move those plan assets and I've never heard it raised that the plan sponsor had no power to do that. Again, that doesn't PROVE anything, but it provides some evidence.

Although it's only a secondary source, note that Q 5:31 from the 403(B) Answer Book (5th edition) seems to agree with my contention that for 403(B) plans that are subject to ERISA, the employer has fidiciary duties. However, it does not address the specific question of whether the employer may change investment options for existing plan assets.

Well, I've flailed around long enough! While it's an unclear question, I believe that the plan sponsor of an ERISA 403(B) plan has fiduciary duties that extend beyond the moment the contribution is invested and that continue as long as the money remains plan assets. For the reasons expressed in my earlier posts, if the employer bears the fiduciary liability, it also has the power to change the investments.

If anyone has a more ironclad answer to the issue, I'm also be interested in reading it.

[Michael Devault]

I, too, wish this question had a clear, definitive answer. Without one, however, I tend to agree with Carol's position.

Keeping in mind that contributions to a 403(B) plan are held by neither the employee or the employer, but rather the custodian or insurance company, the issue of the mechanics of the transfer comes into play.

Amounts contributed to a 403(B) plan (that are not subject to vesting schedules) are non-forfeitable and non-transferrable. In most instances, the funds in the custodial account or annuity contract are held in the name of each individual employee. In this instance, by what right can the custodian transfer funds, which are owned by an individual move funds, when directed to do so by the individual's current or former employer? I wonder how most custodians would react to such a request?

Also, the authority for moving money from one 403(B) account to another is Rev. Rul. 90-24. This ruling indicates that transfers may be made by an employee, a former employee or the beneficiary of an employee. It doesn't seem to permit employers to transfer funds. This may be an oversight, but it likely is due to the ownership issue discussed in my last paragraph. If so, there would seem to be no authority for an employer to move funds.

Maybe some vendors can give us some insight into how they would respond to such a request? It would certainly be valid input into this issue.

[Ellie Lowder]

Interesting discussion - think I'll join it! I agree with both Michael & Carol that individual 403(B) accounts cannot be transferred by the employer. The employer can fulfill fiduciary responsibility by communcating with employees the reasons for the new investment choice(s), and encourage the transfer, but can't FORCE the transfer, I don't think! However, if the employer is the master contract holder of a group annuity (e.g., vs. individual annuities owned and controlled by participants), then I believe employer can, indeed, transfer the assets. Agree? Disagree? Why?

[Guest STLGiant]

IMHO based on the policies and procedures implemented and adopted by the employer, they can indeed replace a vendor, on a going-forward basis. If the contract is a "master contract" I believe it makes it easier than in "individual contract" relationships, but both can be done.

I would tend to believe that if the employer has an "investment vendor policy" in place that provides specific criteria for maintaining a vendor's relationship with the employer, this document will indeed dictate policy. If they don't have one, they should investigate getting one immediately!

The employer has the right to monitor vendors, as well as firing them (barring them from the premises/vendor fairs/advertising)and I'm would argue that they have a DOL fiduciary duty to do so ANNUALLY, especially in non-ERISA plans! Even in non-ERISA arrangements, the DOL is going to police the fact that the employer maintain cursory fiduciary duties. No employer we represent seeks to get into a debate of law with the DOL. For example, knowing when Executive Life or MBL or GA were in financial trouble, it arguably could be the duty of the employer to potentially curtail their agents from doing new business on the premises, or at a minimum have participants sign a waiver of liability to the employer knowing that the insurance, annuity or mutual fund provider were deemed a going concern.

Many employers are reviewing the cost to maintain vendor relationships as well as their IRS compliance and DOL fiduciary duties. We're seeing more employers willing to set a limit on vendors by amount of participants (active or inactive) for a vendor to remain on the employer's qualified list. Typically the minimum amount is 10 participants.

If the amount falls below the 10 participant minimum, the vendor is removed from the qualified list, and no new participants will be offered that vendor's investments. Existing participants will continue to have their deferrals deposited, albeit a new or higher administration/recordkeeping fee may be imposed for non-qualified vendors (as outlined in the employer's plan provisions and investment vendor policies. If a vendor is removed, general participant education will be provided to illustrate a qualified vendor's investment with similar management philosophies, however, the ultimate decision MUST remain with the participant whether to stay and pay an increased administrative fee, or move to a new vendor.

A new wrinkle is whether or not the vendor will be removed from the qualified list should they not operate on an electronic basis for fund deposits, or to the extent they provide MEA calculations which don't include recognition of state retirement programs, participation in qualified plans while working outside the district (e.g. part-time at Sears, or perhaps a self-employed business sponsoring a 401(a) plan...). Too many non-ERISA plan sponsors are being cited for their failure to withhold sufficient payroll taxes, and are adopting policies and procedures to insure that they maintain sufficient compliance standards.

Utilizing a fee to be paid by the participant, so long as it is outlined in a plan summary, communicated to all participants (active and inactive) and agreed to (generally through hold harmless documents) by the vendors is the best practice policy.

FWIW

[MWeddell]

My opinion differs on some aspects of the above post.

If an employer wants its plan to remain non-ERISA, I would urge the employer not to scrutinize the investments, except perhaps in the context of limiting the # of providers, or else the plan accidentally may become subject to ERISA.

The DOL has not jurisdiction to police employers who have non-ERISA plans. On the other hand, employees' state law claims (breach of contract which implicitly required using reasonable care in selecting the annuity issuers) are unlikely to be preempted by ERISA since ERISA doesn't apply.

[Guest RJT]

I think the proper answer can be cobbled together from all of the previous messages, with a few additions.

There are really two types of 403(B) programs out there for these purposes: one, where the employer has control of the funds by being either the custodian or being the owner of the group annuity contract; and, second, where there are individually owned custodial accounts and annuity contracts.

Under the second one, the individually owned contracts, it is unlikely that the employer has any contractual ability to map funds.

Under the first one, the employer probably has the contractual authority to do so, unless the group custodial or the group annuity contract restricts it by its terms.

If the mapping is not restricted, then you look to see if the plan document provides the fiduciary (whether ERISA or state-law) with the ability to map. Even if ERISA provides the authority (which I believe it does-as well as the responsibility), all is for naught unless the plan document delegates that auihtority.

If the document permits mapping, you need to determine if such was disclosed to participants and made a condition upon which the security that was sold. It may even be better if the participant acknowledged in the enrollment material the plan's right to map. Remember, the variable 403(B) investments are registered securities, and caution must be taken to honor the SEC rules regarding these sales.

Finally, the fiduciary will need to due all the proper diligence which supports its activity.