Legal Protections for 403(b) Participants

July 21, 2009 (PLANSPONSOR (b)lines) - A U.S. Supreme Court decision last year widened Employee Retirement Income Security Act protection for defined contribution plan participants, but it is sometimes overlooked that many 403(b) participants enjoy multiple layers of legal protections because of the narrow set of permitted investment products.

In 2008, the U.S. Supreme Court confirmed the right of an ERISA plan participant to bring a claim against the plan’s administrator for an alleged error by the administrator. The decision, James LaRue v. DeWolff, Boberg & Associates, 128 S. Ct. 1020 (2008) , reversed a series of prior decisions which limited recovery to those injuries suffered by the plan as a whole, rather than by an individual participant. One reason for those prior decisions: participants had no direct contractual relationship with the administrator, and thus, absent a specific right under ERISA, the participant would have no standing to assert a claim against the administrator.

In one sense, the LaRue decision extends to ERISA plan participants’ rights similar to those already held by many 403(b) plan participants, in both ERISA and non-ERISA plans. In many 403(b) plans, participants maintain a direct contractual relationship with the investment provider, while the provider may also be performing some or all of the associated plan administrative services.

These can include;

  • Issuers of individual annuity contracts and certificates under group allocated annuity contracts; and
  • Custodians of individual custodial accounts and allocated accounts under group custodial accounts.

Under such allocated arrangements, participants have specific contractual rights which they may generally exercise independent of specific rights and remedies described in the plan. In the case of annuity contracts, those contractual rights also come along with specific requirements and rights prescribed in state insurance law. Similarly, for custodial accounts, additional rights may apply under applicable federal or state banking or trust rules or laws.  

In the case of an ERISA plan, such contractual rights may be in addition to ERISA claims procedures set forth in the plan, under which the participant may seek a remedy through the plan administrator (although in certain cases the ERISA claims procedures may supersede, such as in the case of lesser contractual rights).

In addition, where the participant purchases registered securities in these allocated arrangements – such as interests in a variable annuity separate account or individual mutual fund shares – securities law protections generally extend directly to the participants. By contrast, investments in many qualified plans (including 401(k) plans) may not even be registered with the Securities and Exchange Commission (SEC), due to a carve-out applicable to such contracts. That fact combined with the absence of a direct contractual relationship with the investment provider may mean that the participant is limited to the rights provided under ERISA.

It is also worth noting that the legal rights described in this article are in addition to any additional contractual features, such as those in annuity contracts which provide minimum interest and annuitization guarantees, guaranteed death benefits, or optional guarantees with respect to periodic withdrawals.

However, not all 403(b) plans incorporate either individual contracts or arrangements, or group allocated contracts or arrangements. Some 403(b) plans include unallocated group investment arrangements, in which case some or all of the contractual and other legal rights described above would not apply.

Richard Turner serves as Vice President and Deputy General Counsel for VALIC. He is also a contributing author of the “403(b) Answer Book.”

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.

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