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

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?

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.

HRagain, thank you.

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

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.

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.