incentive for a distribution?

I've got a 403b plan that tried to move from recordkeeper A to recordkeeper B several years ago.  Despite numerous plan documents saying it is an ERISA plan, RKA is insisting that the accounts they hold are non-ERISA accounts and therefore the plan sponsor can't move the accounts.  The financial advisor did a bunch of presentations showing that RKB has lower fees and this convinced about 90% of the people to move, but there are ~15 who just haven't, for whatever reason.  They are all terminated, and all have $7K+ vested balances.

We're launching a new attempt to reason with RKA, but we are expecting it to fail.  One of the directors asked if they could incentivize the participants to either take a distribution or authorize the transfer to RKB.  $100 cash, say.  Since the financial advisor didn't immediately shoot it down, I said that I'd look into it.

How insane and/or illegal is this idea?  More importantly, are there any other good ideas?

Thanks.

Based on your description, one guesses the employer is a § 501(c)(3) charitable organization.

And we assume the employer considers using the employer’s, not the plan’s, money.

Beyond considering whether the incentive might violate an ERISA command, breach a fiduciary responsibility, or break a tax-qualification condition, the employer might consider whether the incentive would be an appropriate use of the charity’s resources.

Or, an expense of about $1,500 might be so trivial than an expense for finding correct answers might be disproportionate to the risks of a wrong answer.

One idea to consider: Spin off those 15 participants into Plan B, and then terminate Plan B and tell the insurer that they are required to treat the annuity contracts as distributed from Plan B upon termination. 

Another idea to consider: Determine if the 15 annuities are unclaimed property (e.g., bad addresses for participants; dormant accounts and no activity by participants).  If so, the insurer is required to escheat the assets to the relevant state unclaimed property fund. ERISA will not preempt state unclaimed property law, because the insurer says that ERISA does not apply.

Final idea to consider: Review Section 109 of the SECURE Act and related updates to Code section 403(b).  Tell the insurer that the sponsor has deselected the annuities as investment options, amend the plan, and tell the insurer that they must treat the contracts as qualified plan distribution annuity contracts.

Good luck and please respond with what happened!

My recollection when faced with this problem years ago is that the annuities might be a contract between the participant and the RK. In that case, maybe AMDG's idea might work. We had a devil of a time with a major national provider of NFP assets who even called participants at dinnertime in an active campaign to keep them. And this, when we learned that a larger, more prestigious account, they let distribute all the annuities to participants. Another problem is the annuity language might allow say a to 10-year distribution tail which is unconscionable in today's world.

Do you have a copy of the contract, and what does it say about amendment?  I have seen at least one that allowed for amendment by the sponsoring organization. The Insurance Company has no duty to deviate from their filed contracts. In fact they have to follow them, and can get in trouble for market conduct if they treat individuals differently under the same contract, so unless it is amended you will have an issue trying to move them. 

I am curious whether you have actually talked with the 15 individuals about moving like has someone had an actual conversation with them?  That might be worth it to get rid of the potential liability. Probably the easiest way to get them moved is to talk to the owners. 

On 11/14/2024 at 2:32 PM, Peter Gulia said:

Based on your description, one guesses the employer is a § 501(c)(3) charitable organization.

And we assume the employer considers using the employer’s, not the plan’s, money.

Beyond considering whether the incentive might violate an ERISA command, breach a fiduciary responsibility, or break a tax-qualification condition, the employer might consider whether the incentive would be an appropriate use of the charity’s resources.

Or, an expense of about $1,500 might be so trivial than an expense for finding correct answers might be disproportionate to the risks of a wrong answer.

To the last point, yes, $1,500 would be trivial to an entity this size.  I mean, I wouldn't necessarily want to be the one explaining it to the board, but I suspect that they have been frustrated enough with this over the years that seeing this resolved is worth it.  Presuming that it is done within the parameters of what is OK or close enough to it so as to be defensible, I suppose.

On 11/15/2024 at 5:14 PM, AMDG said:

One idea to consider: Spin off those 15 participants into Plan B, and then terminate Plan B and tell the insurer that they are required to treat the annuity contracts as distributed from Plan B upon termination. 

Another idea to consider: Determine if the 15 annuities are unclaimed property (e.g., bad addresses for participants; dormant accounts and no activity by participants).  If so, the insurer is required to escheat the assets to the relevant state unclaimed property fund. ERISA will not preempt state unclaimed property law, because the insurer says that ERISA does not apply.

Final idea to consider: Review Section 109 of the SECURE Act and related updates to Code section 403(b).  Tell the insurer that the sponsor has deselected the annuities as investment options, amend the plan, and tell the insurer that they must treat the contracts as qualified plan distribution annuity contracts.

Good luck and please respond with what happened!

These are great ideas!  Not sure about the second one; they have contact with all of these people (see next comment), but the others might be promising... can we just declare that Spinoff Plan B is going to consist of solely the remaining contracts for terminated participants at Provider A?  I get that there's additional work involved with creating a second plan etc.

10 hours ago, Gina Alsdorf said:

Do you have a copy of the contract, and what does it say about amendment?  I have seen at least one that allowed for amendment by the sponsoring organization. The Insurance Company has no duty to deviate from their filed contracts. In fact they have to follow them, and can get in trouble for market conduct if they treat individuals differently under the same contract, so unless it is amended you will have an issue trying to move them. 

I am curious whether you have actually talked with the 15 individuals about moving like has someone had an actual conversation with them?  That might be worth it to get rid of the potential liability. Probably the easiest way to get them moved is to talk to the owners. 

The plan's financial advisor has reached out to all of them, showing the fee structure they are currently under and how it compares unfavorably with the new plan investments that they can elect to transfer to.  For a while, the company even offered to pay any surrender charges, and these participants still elected not to move.  We hear that the FA on these old accounts (which is not the FA on the new accounts) reached out to them and told them that their former employer was trying to confuse them.  New FA did actually speak with some of them, and he is offering to do so again.  In fact, he is also offering his services should they wish to roll out to personal IRAs instead (knowing that he has to tread carefully here).

I'll see if I can get my hands on the contract.  Thanks for the idea.