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January 22, 2007 12:00 AM

Honoring contracts

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    Defined contribution plans ideally blend institutional and retail elements to get the right chemistry for participants and sponsors, but sometimes the mix becomes combustible.

    Problems can arise in a DC plan over who has the authority to switch assets to a new investment provider — the plan sponsor as fiduciary, or the plan participant as owner.

    That issue was triggered most recently when Connecticut's $1 billion 403(b) plan sought to map, or automatically transfer, assets from TIAA-CREF investment options into similar options offered by the plan's new provider, ING U.S. Financial Services.

    TIAA-CREF refused to map the assets to the new funds without the consent of each participant, saying its contract requires such individual authorization. Connecticut objected, threatening to sue.

    Almost all participant-directed plans seek mapping when they change providers. But disputes can arise when the old options are wrapped in annuity contracts, which can restrict changes.

    The Illinois State Universities Retirement System faced a similar obstacle, also with TIAA-CREF, when it sought to close some funds. In that case, however, the fund did not seek to end TIAA-CREF's role as a bundled provider for the system's $475 million 401(a) plan.

    SURS objected, and continues to object, to TIAA-CREF's opposition to mapping, but it isn't suing. But SURS has withheld any new business for TIAA-CREF unless it agrees new funds would be mutual funds without such restrictions.

    TIAA-CREF, for its part, believes it must legally honor contracts that require participant authorization of transfers.

    Sponsors need to be more sophisticated in choosing providers and funds. If they avoid providers with transfer restrictions and more inflexible platforms, they will eliminate the need to make a wholesale change in funds when bundled providers are changed.

    Sponsors must think about the long-term implications of contracts that appear to restrict the employers or the employees. Such restrictions must be recognized and negotiated before the contracts are signed.

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      • Latest ESG News
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