I've got three more stories of ridiculous paperwork issues created by the IRS 403(b) Regulations that went into affect on January 1st, 2009. While I believe the IRS had good intentions and I supported the overhaul of the regs, the outcome for participants has been a disaster and is leading to higher costs, lots of paperwork headaches and consternation between employers, participants and their vendors (as well as the TPA's that service them).
It has also created a situation where it is extremely difficult for an employee to do something on their own (like move money out of a high-cost vendor), forcing them into the arms of insurance agents who many times have an agenda of selling annuities, rather than the best interest of clients.
The first story is that of a retired Superintendent client of mine who simply wanted to rollover the remaining balance at one of his old 403(b) companies, we'll call it Company V, to his IRA. There wasn't a lot of money in the account, but he wanted things consolidated - now 14 months later the rollover is still stuck in 403(b) limbo. So what happened?
After putting together the 8 page document that included the following:
Letter of Instruction to Company Receiving Rollover asking for a Letter of Acceptance and asking them to forward all the included original documents to a Compliance Third Party Administrator (CTPA),
Letter of Instruction to the Compliance Third Party Administrator along with,
Compliance TPA's paperwork
Company V's distribution paperwork
The 8 page document had to travel from Southern California to Kentucky, then from Kentucky to Florida, then from Florida to Texas. If all went well, once the paperwork hit Texas, the rollover check would be issued and sent to Kentucky. Things didn't go well.
All of the paperwork made it to Texas, but once their, Company V rejected it stating that the wrong Compliance TPA signed off on the document. I knew this to be wrong, but they sent the document of another Compliance TPA to be filled out by my client - so we played along and sent it to Company V, who then faxed it to the Compliance TPA. The Compliance TPA contacted me to tell me that they couldn't read the faxed copy and requested all the documents from me, so I faxed them in. The next day the Compliance TPA rejected the request stating what I knew from the beginning - they were not the Compliance TPA. Next, I called Company V without my client - there was no need to involve them and I was not going to require any confidential information from Company V, I needed to inform them that they had the wrong administrator on the account. The call did not go well. The Company V representative was very rude and told me that they needed the client on the line to tell them who the right Compliance TPA was. I remarked that the client wouldn't know (rarely do employees know who the Compliance TPA is, especially one who has been retired for five years), but that I know who it is as I spoke directly with payroll at the school district. The rep told me he didn't care and wouldn't take the information from me, it had to come from the client...which made no sense. I told him I wanted a supervisor and he told me no. Now I was a bit ticked off and started thinking that this was just a tactic to prevent the money from moving. I demanded a supervisor and eventually the rep relented and transferred me to a nice lady who told me that I was wrong about the administrator...goodness sake. So, now the supervisor is going to check with another division of Company V and try to get it straightened out...and then she'll call me back. I'm not confident.
Here we are 14 months after the initial request and I'm stuck - Company V won't distribute without the TPA approving, but they have the wrong TPA listed and won't accept the approval from the correct TPA. Someone has to budge. What is most annoying is that the client is over 59 1/2 and thus eligible for the distribution regardless of if he is employed or not.
Thank you IRS for creating this mess.
As if that wasn't enough I have another new client that wants to roll their money out of the same Company, Company V. While I haven't had any issues so far, when I explained to the client what was needed in order to do the exchange desired, the client's eyes rolled back in her head. Here is the process and the forms:
I printed 27 pages (don't worry, I did front and back) representing four different forms:
Outgoing Exchange Form for Company V (Distributing vendor)
Account Application for new Company (Receiving Vendor)
Compliance TPA Form
Incoming Transfer form for new Company
Once my client has filled out and signed all these documents I will do the following:
Mail new account application and wait for account to open
Create letter of Instruction to receive a letter of acceptance from the new Company for the exchange
Submit the letter of acceptance and all the other docs above (except new account doc) to the Compliance TPA
Cross my fingers and pray the exchange is approved and then submitted to Company V for them to process the exchange
This whole process will likely take six weeks - if we are lucky and the paperwork will have traveled to Texas, Denver and likely Texas again.
This is an administrative nightmare. But for people who know the system, like me, it is a competitive advantage. Annuity sales agents who hated the new regs are probably thanking heaven right now as they're place in-between their client and their client's money is forever solidified due to the crazy bureaucracy created by poorly thought out 403(b) regs which have had disastrous unintended consequences.
There was another way - the IRS could have grandfathered ALL accounts as of a specific date, allowing employers to focus solely on the future. Instead, employer, Compliance TPA's, vendors, employees, Advisors and insurance agents are stuck in the past fighting to move money around in a manner that leads to higher costs, entrenched & unneeded compliance services and poor products.
Scott Dauenhauer, CFP, AIF, MSFP
P.S. Yes, I had another story, but I'm just to exhausted to detail the third one.