403(b) Plans: The Prior Provider Hurdle

For example, Blake Thibault, Vice President, Heffernan Financial Services, cites a case in which a sponsor client has decided to use a new provider for its 403(b) plan and also transfer account balances from a 401(a) plan with the prior provider – consisting of employer contributions plus earnings – into their 403(b) arrangement. The prior provider has not been forthcoming in providing the correct forms in bulk to the plan sponsor for participants to request their rollovers, but is instead requiring that each participant call individually to request a rollover from the 401(a) plan.

According to the plan sponsor representative, Diana Buchbinder, Director of Organizational Facilities at The Exploratorium; a museum of science, art, and perception; the provider is requiring this not just for annuities, which are contracts between participants and providers, but for all investment options within the plan.

In addition, Buchbinder said when the participants did call the prior provider, representatives tried to talk them out of moving their money. Thibault added that they’ve encountered several providers trying to talk participants into keeping funds with them.

Increasing Anxiety

While the new regulations do not require that funds be moved from incumbent providers to new providers (see IRS’ Architect Dispels Myths about 403(b) Regs ), Buchbinder feels that urging participants not to make the move can interfere with the sponsor’s plans for compliance and can increase anxiety among participants who may already be nervous about the changes.

“You would think they would act in a way to make us think we were making a mistake [by not using them going forward], but this does not make us think we were making a mistake,” she says.

“[S]ponsors are doing this to comply with the regulations and create a value added benefit to participants, they are not doing it for selfish reasons,” Thibault notes, adding that he feels some providers are creating obstacles. He said other problems being encountered included that some prior providers are being very unresponsive to communications from him or the plan sponsors, and some are providing forms and later rejecting them when participants turn them in.

Buchbinder also noted that two prior providers have refused to provide any forms or instructions until The Exploratorium enters an information sharing agreement (ISA) with them – a step that is not required by the new regulations (see (b)lines Ask the Expert – Information Sharing Agreements ). An executive of one large plan provider, who declined to be named, explains that information sharing agreements are important to have even with providers who will not be used going forward if distribution and loan requests are allowed during the transition.

Thibault points out that any holdup runs up against timing requirements for notifying participants of plan terminations and investment option changes.

These issues are in addition to the challenges presented by vendor contracts with individual participants, which Barbara Delaney, President and Founder of StoneStreet Advisors, an NRP member firm, warned sponsors to watch out for at PLANSPONSOR’s 2008 403(b) Summit, Several plan sponsors at the event complained vendors were refusing to tell plans anything about such vendor-participant arrangements – even the dollar value of the assets involved – since the plans are not a legal party to them (see 403(b) Summit: With Investment Options, More Is Not Always Better ).

Last year Delaney expressed a hope that the Department of Labor would pressure vendors to let participants out of such contracts to help sponsors with regulation compliance, but this year she says there has been no change.

While it's understandable how advisers and sponsors could perceive these actions as prior providers just being difficult, perhaps the problem is really a lack of communication.

Buchbinder noted that her understanding of her organization's 401(a) plan design was not the same as what the prior provider now represents to her. While it may or may not fit with 401(a) plans, as for 403(b) plans, John Heywood, a Principal at Vanguard (which is cited by sponsors as an incumbent provider requesting an ISA be in place), says a plausible explanation is that most sponsors, especially in the K-12 segment, were not hands-on and have no idea of the provisions of custodial agreements for their plans or individual provider agreements with participants. Heywood is responsible for a number of products including 403(b)s offered to smaller organizations

In addition, Heywood points out that there has typically been a wide variety of features, investments, and practices in 403(b) programs, possibly making it harder for sponsors to be familiar with all facets and conditions of the plan.

Buchbinder says there haven't been reasons provided when she has confronted her prior provider about the hurdles that have been put up, and even says provider representatives may be agreeable at first, but are unhelpful later. Heywood reminds providers that it is good practice for providers to be upfront with plan sponsors and advisers about any legal, technical, or capacity issues they may have with provider requests.

For his part, Thibault says he is documenting processes with different providers to educate sponsors on what to expect when changing providers. Buchbinder says in hindsight she thinks it may have helped if others beyond the benefits staff at her organization had initiated the communication with the provider of its intent for the 403(b) and expectation from the provider. If nothing else, she says, it could have allowed the benefits staff to elevate problems more quickly and perhaps get a quicker response from the provider.

An executive of one large plan provider, who declined to be named, says his firm focuses on moving clients to a new provider as quickly as possible, but notes that the timing of this move is highly dependent on three factors:

• The explicit activities the client wants the current provider to focus on such as reporting, loan transfers, etc. shapes current provider's shut down plan and tasks;
• Definition and set up of plan features and service model decisions for the future provider; and
• Appropriate timing to introduce the new plan to employees.

The timing should be negotiated between all stakeholders (current provider, future provider, and plan sponsor), he adds.

He further explains legal issues can and do arise predominantly focused on the fiduciary responsibilities and protections for employees, and the issues depend on the specifics of provider-employee contract details. Finally, the executive notes incumbent providers do have a legal right to ask participants to keep their funds with the provider unless there is an agreement in place that says otherwise.

Heywood observes that an incumbent provider may not have the administrative or technological capability to deal with large movements, especially if the provider is small. Also some have not traditionally tracked vesting, so knowing what funds can move would be a challenge. He notes that a provider or sponsor would not want the provider to put in new programming to handle assets that are leaving, because it would be an expense to the provider, and the cost may be passed to participants.

Providers should admit to a lack of administrative or technological capabilities, and work with sponsors, according to Heywood. "Good word of mouth, even from prior clients, can lead to new business," he adds.