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Question 15 — De-selected 403(b) Plans

Q. If a school district decides to eliminate vendors and go to a single provider, can the de-selected 403(b) plans of employees be moved to an IRA? This is similar to the situation in which an employer changes its pension plan; I believe that clients many times have the option to roll to the new plan or to roll over to an IRA when that happens. Did the IRS regulations take this into consideration, since it may become difficult for participants to exercise loans, withdrawals and/or transfers without TPA oversight? This is assuming, of course, that there is no individual savings account between the new vendor and the deselected vendors.

In many cases, it is apparent that the gaining vendor may represent to the employees the need or requirement to transfer all of their 403b assets to the new plan to ensure regulation compliance, even if it is counterintuitive to the participant’s overall financial objectives. Obviously, as a result, the employee relationship with their financial advisor could also be severed because of any movement of assets outside the control of the advisor and participant.

A. You have succinctly captured a very large problem for non-grandfathered “orphan” account holders! Participants holding accounts of providers de-selected after Jan. 1, 2005, often do encounter either substantial delays, or total inability, in getting their transactions (e.g., loans and hardship withdrawals) handled. And, de-selection of the provider is not a qualifying event for a distribution; thus, no rollovers can take place unless the participant is otherwise eligible to receive a distribution. 

However, if the employer’s plan permits exchanges, those participants could, if it is otherwise in their best interests, exchange the orphan account to the account of a provider that is a part of the employer's plan. I agree that the “forced” exchange for any participant that needs a loan or a hardship withdrawal can have negative impacts regarding the loss of the relationship with the current financial advisor, and the product with which they have been well-pleased. 

NTSA, in fact, met with the group that wrote the final regulations and Revenue Procedure (Rev. Proc.) 2007-71, to urge that all existing 403(b) accounts (estimated at seven million or so) be grandfathered — that is, not required to be a part of the employer’s plan. We had thought that is what would happen, but unfortunately it did not. In Rev. Proc. 2007-71, the IRS did grandfather accounts held by providers which had not received contributions for any employee on and after Jan. 1, 2005; however, it failed to grandfather account holders whose providers were de-selected between Jan. 1, 2005 and Dec. 31, 2008. Also grandfathered are account holders for which a tax-free transfer properly done under “old” Revenue Ruling 90-24 (now repealed) to a non-approved provider took place on or before Sept. 24, 2007.