Could an Unknown Recordkeeper Be Holding a Former Participant’s 403(b) Assets?

Q: We are a public university that sponsors a 403(b) plan. Recently, a terminated employee came to us requesting approval for a 403(b) distribution. The problem is, the recordkeeper involved is not only unrelated to our current plan, but a recordkeeper we’ve never heard of! Should we be concerned?

Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: As unusual as this situation may sound, it is actually not all that uncommon given the history of 403(b) plans. Several features of the regulatory landscape that existed prior to 2009 can explain how a recordkeeper unknown to the plan sponsor might legitimately be holding a participant’s assets. For example:

• There was no written plan document requirement for 403(b) plans until the IRS issued comprehensive final regulations effective January 1, 2009 (see 72 Fed. Reg. 41128 (July 26, 2007)), meaning employers had no obligation to document all of the 403(b) contracts held by their employees.
• For many years prior to the final regulations (with some limited grandfathering), Rev. Rul. 90-24 permitted participants to exchange their 403(b) contracts for contracts with different carriers without employer involvement or approval, as long as the new contract had distribution restrictions at least as stringent as the original.
• The IRS has recognized through its FAQ guidance that certain pre-2009 vendor contracts are excluded from the written plan requirement altogether.

Any one of these circumstances could explain why the recordkeeper in question is unknown to you. That said, the situation should be thoroughly investigated with outside retirement plan counsel to determine which, if any, of these provisions applies and whether the participant’s assets are held properly.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Amy.Resnick@issmarketintelligence.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future column.