The Difference Between an Individual Custodial Agreement and a Group Custodial Agreement

Both group and individual custodial agreements can have many of the same participant features such as accepting both employer and employee contributions, allowing for participant loans and hardship withdrawals, etc. The biggest differences between the two types of agreements are the level of control the employer has over the assets in the plan and the simplicity of managing those assets.

First, it is important to understand who the contract holder is with the custodial agreements. 

If an employer chooses to allow individual custodial agreements in their plan, each approved investment provider would have their own individual agreement that would govern the participants account under the plan. Different agreements might have different provisions, such as provider A might allow both loans and hardship withdrawals, whereas provider B might only allow hardship withdrawals and not loans. These individual agreements require that any changes to participant balances (i.e., making contract exchanges) need to be authorized by the participant. This means if an employer chooses to eliminate an investment provider, the employer is limited to stopping contributions from being made to the deselected provider. The employer cannot force the participant to move their existing assets from the deselected provider to an approved provider. This is due to the fact that the only parties to the contract are the participant and the investment provider (vendor). Investment companies not familiar with 403(b)s attempt to map over assets without the participants consent—this is not permitted!

Group custodial agreements name the employer (plan sponsor) as the agreement holder. While the employer is the agreement holder, each participant has his or her own interest in the retirement account. The employer has the right to choose and control who the investment provider is for the plan and the participant can choose what investments under the custodial agreement they want to invest. These agreements are similar to 401(k) agreements where the employer controls the custodial agreement (or the Trust) and can choose the custodian (or Trustee) where contributions are sent and were existing assets are held.

There are some potential concerns with having individual agreements. They include:  

• If the plan wants to reduce the number of approved investment providers, it can. However, as mentioned above, the employer can only control the providers that are allowed to accept contributions. The employer cannot force the existing assets out of the deselected provider and exchange them over to the approved providers, without the consent of the participants.
• Removal of excess contributions would require employee authorization.
• Contract exchanges between approved providers require authorization by either the employer or its authorized TPA. 
• If the 403(b) plan is subject to ERISA, reporting and testing can be difficult to coordinate between multiple investment vendors.  

It is important to note that most individual annuity and group annuity contracts have the same issues as above.

On the other hand, investment companies that offer only individual contracts are protected from “losing” those assets by the employer moving them in one transfer to another vendor. Employees also feel more protected since their assets cannot move without their consent.

Rob Whitman is a Technical Consultant with PenServ Plan Services, Inc.