Annuities remain a big impediment to simplification and cost-cutting by 403(b) sponsors, consultants say.
Making changes has taken “many years longer for 403(b) plan sponsors compared to their 401(k) peers, who started plans from scratch post-ERISA,” said William Ryan, a Chicago-based associate partner for Aon Hewitt Investment Consulting Inc. One reason is that between the start of 403(b) plans in 1958 and the enactment of the Employee Retirement Income Security Act in 1974, annuities were the only investment allowed for 403(b) plans, he said.
The heavy reliance on annuities by 403(b) plans has been a prime target of the suits filed by the law firm Schlichter, Bogard & Denton.
The complaint against Johns Hopkins University, Baltimore, for example, cites the TIAA Traditional Annuity as having “severe restrictions and penalties for withdrawal if participants wish to change their investments.”
Some participants must pay a 2.5% surrender charge “if they withdraw their investment in a single lump sum within 120 days of termination of employment,” the complaint said. “The only way for participants to withdraw or change their investment in the TIAA Traditional Annuity is to spread the withdrawal over a 10-year period, unless a substantial penalty is paid.”
Mr. Schlichter used the same arguments against the same annuity in many of his other 403(b) lawsuits.
Because many annuities are offered to participants through individual contracts, sponsors' efforts at consolidating investment options have been hampered, DC consultants say.
“The 403(b) plans are unique because they were designed as individual plans under the tax code — like individual retirement accounts — and not like the group 401(k) plans,” said Bonnie Treichel, senior consultant for the Multnomah Group Inc., a retirement plan consulting firm in Portland, Ore.
Many annuities offered in 403(b) plans are “legacy assets,” a product of times when guidelines for 403(b) plans were much different from those for 401(k) plans.
Although 403(b) plans can offer annuities through group annuity contracts going forward, they cannot force participants with individual contracts to join.
“You can't unwind individual contracts overnight,” Ms. Treichel said. “There's a movement toward group contracts. It's up to the sponsors to educate (participants) about individual vs. group contracts.”
