I work with a lot of 403(b) plans. This means my daily work life can be very complicated, especially when it comes to consolidating recordkeepers for my clients. More often than not, 403(b) plans have more than one vendor with which a participant may actively invest. They also may have additional active, or inactive vendor(s) with whom the participant retains an account. This may seem a bit odd, but there may be a good reason for this structure, such as a guaranteed interest rate or minimum crediting rate from before the Great Recession, or a painful surrender charge preventing the participant from removing his/her money. But as plan fiduciaries have discovered in the recent case law having multiple recordkeeping vendors can be detrimental to the participant (and plan fiduciaries) as they tend to result in higher fees for each vendor due to the lack of economies of scale, which can be a fiduciary issue. This has resulted in a wave of recordkeeper consolidation over the last 10 years, of which I have seen several plans not properly prepare for how to address systematic withdrawals (SW).
When I reference SWs, I’m specifically talking about the plan sponsor, rather than the participant, initiating the movement a participant’s money from one recordkeeper to another recordkeeper. While there are a variety of valid and beneficial reasons to do so, each consolidation or vendor change must address one specific issue: how to continue participants’ systematic withdrawals.
SWs occur when a participant establishes a regular and recurring distribution from the plan. This may be a withdrawal to a person’s bank account to pay for a participant’s retirement income needs, or a withdrawal to meet the Internal Revenue Service’s Required Minimum Distribution (RMDs) requirements, or even a third party as per a Qualified Domestic Relations Order (QDRO). Not matter how they become established, SWs can be vital to a participant’s short-term income security as well as compliance with regulatory mandates or court-ordered directives.
While most recordkeepers will receive the SW information from the prior vendor as part of the data transfer, because SWs are not a common occurrence they are easily overlooked, which is why I am writing this blog. In the past few years, I have seen several cases where the vendor losing the plan does not transfer the SW information to the new recordkeeper, thereby resulting in a participant not receiving their SW, RMD, or worse, their QDRO. I have also seen where there is a partial transfer of plan assets and because the legacy recordkeeper is not losing the whole plan but is being instructed to send a portion of the plan's money to a new vendor, sends only the assets and not the SW information. Please keep in mind that most recordkeepers have the appropriate controls in place to ensure SWs are appropriately addressed. However, in my experience, some plans may choose to leave their current vendor because there have been problems, or the recordkeeper is exiting the business. This is a prime opportunity for errors that you need to account for.
As you are imagining, this can be very painful to participants and will complicate the lives of the human resources team. It is with the knowledge of hindsight that I strongly recommend you make the documentation of SWs a part of your conversion process regardless of your perception of the terminating vendor. Your participants and legal counsel will be grateful.
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