403(b) Portability
Rev. 12/20/07, E-mail Alert 2007-17

May an employer that maintains an ERISA 403(b) plan move the entire 403(b) arrangement to a different annuity provider or mutual fund provider?

Yes, provided there is a valid business reason for the substitution, the employer may transfer the entire 403(b) plan, including all the employees’ assets to a different vendor. An example of a valid business reason to change vendors would include sub-par performance by the current vendor over a period of time as compared to market indices. However, any decision to change vendors is subject to ERISA’s fiduciary prudence requirements and cannot result in a significant loss to the 403(b) participants. This can frequently occur due to surrender charges when funds are transferred from an annuity contract to a mutual fund. While the proposed 403(b) regulations specifically addressed this issue, no provision was included in the final regulations. It should be remembered that while employers sponsoring 403(b) plans may assert their fiduciary duty to move assets, most 403(b) arrangements are non-ERISA with the contracts being between the vendor and the individual participants. Further, some vendors to 403(b) arrangements have contested the employer’s ability to take this action on behalf of employees.