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SponsorNews - December 2015

DOL Guidance to Locate Missing Participants

Rebecca Moore

Aug 18, 2014 --- Sponsors of terminated defined contribution (DC) plans can use new guidance from the Department of Labor (DOL) to satisfy the regulator’s expectations for finding and paying missing participants. ---

Field Assistance Bulletin (FAB) 2014-01 addresses ways for fiduciaries of terminated DC plans tofulfill their obligations under the Employee Retirement Income Security Act (ERISA) to locate missing participants and properly distribute the participants’ account balances. The DOL notes that under Title I of ERISA, it generally views the decision to terminate a plan as a “settlor” decision rather than a fiduciary one. However, the fiduciary responsibility provisions of ERISA govern the steps taken to implement this “settlor” decision, including steps to locate missing participants. A plan fiduciary’s choice of a distribution option for a missing participant’s account balance also is a fiduciary decision subject to the general fiduciary responsibility provisions of ERISA.

The FAB eliminates the requirement in FAB 2004-02 to use the discontinued IRSletter-forwarding service or the SSA letter-forwarding service. In their place, the required search steps have been expanded to include the use of electronic search tools that do not charge a fee.

Searching for Participants

If routine methods of delivering notices to participants, such as first-class mail or electronic notification, are inadequate, the DOL says plan sponsors should:

  • Use Certified Mail. Certified mail is an easy way to find out, at little cost, whether the participant can be located in order to distribute benefits. The DOL provided a model notice that could be used for such mailings as part of a regulatory safe harbor, but its use is not required and other notices could satisfy the safe harbor.
  • Check Related Plan and Employer Records. While the records of the terminated plan may not contain current address information, it is possible that the employer or another of the employer’s plans, such as a group health plan, may have more up-to-date information. For this reason, plan fiduciaries of the terminated plan must ask both the employer and administrator(s) of related plans to search their records for a more current address for the missing participant. If there are privacy concerns, the plan fiduciary engaged in the search can request that the employer or other plan fiduciary contact or forward a letter for the terminated plan to the missing participant or beneficiary. The letter would request that the missing participant or beneficiary contact the searching plan fiduciary.
  • Check With Designated Plan Beneficiary. In searching the terminated plan’s records or the records of related plans, plan fiduciaries must try to identify and contact any individual that the missing participant has designated as a beneficiary (e.g., spouse, children, etc.) to find updated contact information for the missing participant. Again, if there are privacy concerns, the plan fiduciary can request that the designated beneficiary contact or forward a letter for the terminated plan to the missing participant or beneficiary.
  • Use Free Electronic Search Tools. Plan fiduciaries must make reasonable use of Internet search tools that do not charge a fee to search for a missing participant or beneficiary. Such online services include Internet search engines, public record databases (such as those for licenses, mortgages and real estate taxes), obituaries and social media.

If a plan administrator follows the required search steps but does not find the missing participant or beneficiary, the duties of prudence and loyalty require the fiduciary to consider if additional search steps are appropriate, the DOL says. A plan fiduciary should consider the size of a participant’s account balance and the cost of further search efforts in deciding if any additional search steps are appropriate. The specific additional steps that a plan fiduciary takes to locate a missing participant may vary depending on the facts and circumstances, but could include the use of Internet search tools, commercial locator services, credit reporting agencies, information brokers, investigation databases and analogous services that may involve charges.

According to the FAB, a plan fiduciary may charge missing participants’ accounts reasonable expenses for efforts to find them. The amount charged to a participant’s account must be reasonable and the method of allocating the expense must be consistent with the terms of the plan and the plan fiduciary’s duties under ERISA. Plan fiduciaries must be able to demonstrate compliance with ERISA’s fiduciary standards for all decisions made to locate missing participants and distribute benefits on their behalf. If audited, plan fiduciaries could demonstrate compliance using paper or electronic records.

Distributions to Missing Participants

If a plan sponsor is unable to locate missing participants or obtain distribution directions, Section 404(a) of ERISA requires plan fiduciaries to consider distributing missing participant benefits into individual retirement plans (i.e., an individual retirement account or annuity). The DOL says, in its view, in most cases, the best approach in selecting among individual retirement plans will be to distribute the missing participant’s account balance into an individual retirement plan in accordance with the Department’s regulatory safe harbor for terminated DC plans.

If benefits are distributed into an individual retirement plan, fiduciary judgment must be used to choose a trustee, custodian or issuer to receive the distribution, and to choose an initial investment for the plan. The DOL published a safe harbor regulation for plan fiduciaries to satisfy their fiduciary responsibilities under section 404(a) of ERISA when making certain mandatory rollover distributions to individual retirement plans. In general, this automatic rollover safe harbor applies to distributions of $5,000 or less for participants who leave an employer's workforce without electing to receive a taxable cash distribution or directly roll over assets into an individual retirement plan or another qualified plan.

However, in 2006, the DOL strengthened its policy by publishing the safe harbor in a final regulation that covers distributions from a terminated DC plan on behalf of a missing participant or beneficiary into an individual retirement plan or inherited individual retirement plan. When plan sponsors comply with the conditions of the safe harbor, fiduciaries satisfy their ERISA 404(a) duties in the distribution of benefits, the selection of an individual retirement plan provider and the investment of the distributed funds. The conditions include choosing investment products designed to preserve principal and whose fees and expenses are not excessive when compared to other individual retirement plans offered by the provider.

If a plan fiduciary cannot find an individual retirement plan provider to accept a direct rollover distribution for a missing participant or determines not to make a rollover distribution for some other compelling reason based on the particular facts and circumstances, the fiduciary may consider two other options: 1) opening an interest-bearing federally insured bank account in the name of the missing participant or beneficiary, or 2) transferring the account balance to a state unclaimed property fund. Before making such a decision, however, the fiduciary must prudently conclude that such a distribution is appropriate despite the potential considerable adverse tax consequences to the plan participant.

According to the FAB, unlike tax-free rollovers into an individual retirement plan, the funds transferred to a bank account or state unclaimed property fund generally are subject to income taxation, mandatory income tax withholding and a possible additional tax for premature distributions. Moreover, any interest that accrues after the transfer generally would be subject to income taxation upon accrual. The DOL points out these tax consequences reduce the amount of money available for retirement, and a prudent and loyal fiduciary would not voluntarily subject a missing participant’s funds to such negative consequences in the absence of compelling offsetting considerations. In most cases, a fiduciary would violate ERISA section 404(a)’s obligations of prudence and loyalty by causing such negative consequences rather than making an individual retirement plan rollover distribution, the DOL warns.

Finally, the DOL says 100% income tax withholding is not an option. Withholding 100% of a missing participant’s benefits would in effect transfer the benefits to the IRS. The DOL says it reviewed this matter with IRS staff at the time it issued FAB 2004-02, and concluded that using this option is not in the best interest of participants and beneficiaries and would violate ERISA’s fiduciary requirements.

Concerns About Automatic Rollovers

The DOL notes that fiduciaries have expressed concerns about legal issues that might prevent them from establishing individual retirement plans or bank accounts for missing participants, including perceived conflicts with the customer identification and verification provisions (CIP) of the USA PATRIOT Act. The CIP provisions establish standards for financial institutions to verify the identity of customers who open accounts. The DOL says the Treasury and other Federal functional regulators have determined that the act requires that banks and other financial institutions apply their CIP compliance program only at the time a former participant or beneficiary first contacts such institution to claim ownership or exercise control over the account. CIP compliance will not be required at the time an employee benefit plan establishes an account and transfers the funds to a bank or other financial institution for purposes of a distribution of benefits from the plan to a separated employee.

The DOL also notes that some issues caused by the application of state laws, including those governing signature requirements and escheat are beyond its jurisdiction.

According to the FAB, once a plan fiduciary properly distributes the entire benefit to which a missing participant is entitled, the distribution ends the individual’s status as a participant covered under the plan and the distributed assets are no longer plan assets under ERISA. However, if the distributed benefit is reduced due to a fiduciary breach, the individual would still have standing to file suit against the breaching fiduciary under section 502(a)(2) of ERISA.





Breaking Up (with a Recordkeeper) Isn't Hard to Do

August 12, 2014 ( Changing retirement plan providers (recordkeepers) doesn't have to be a bad experience.

Churn rates, or the percentage of plan sponsor switching recordkeepers, have actually slipped, says Bill Harmon; senior vice president of 401(k) markets at Great-West Financial in Greenwood Village, Colorado. In the smaller market, plans might change every five to seven years, he says. Larger plans have a lower turnover rate, but conversions are simply a fact of plan life. Sooner or later, someone is simply going to want a change.

One reason for the decrease in conversions might be that small-plan sponsors have a lot on their plates, Harmon says, given the Affordable Care Act and looking after their core business. The market is up; participants are relatively happy. In short, Harmon says, a certain amount of pain is necessary to galvanize a plan sponsor into deciding to go through the complexity of a plan conversion.

Reasons for a change are simple, Harmon feels. “It comes down to systems and people,” he tells PLANSPONSOR. “It sounds so simple, but most of the time, investments are pretty similar, and with fee disclosure a lot of costs structures have come to the middle.” The plan sponsor that wants to change recordkeepers generally is not having a good systems experience, which can stem from the way the plan was set up initially, or an actual relationship with a the account manager or the field relationship manager.

It’s likely the recordkeeper has already had several chances, Harmon says, and mistakes on the systems or the human side are usually the culprit. It could be a mistake on a loan for the fifth time, or the plan has just outgrown the product. “Some recordkeepers focus on certain markets and don’t have certain features,” he says. A recordkeeper might offer only group annuities, and the plan has increased in size and wants different share classes, wider investment classes or more flexibility on the net asset value. Plan sponsors may feel that their plan is set up incorrectly, Harmon says, and they may be experiencing a lot of systems problems.

But when plan sponsors do think about changing recordkeepers, fear of the conversion process can get in the way of making a decision. Harmon says he’d like to dispel the myth that says changing recordkeepers—a plan conversion—is a bad experience.

Conversion is neither horrible nor scary, Harmon says. Some firms convert thousands of plans a year and have this process down to almost a science—but there is also an art to knowing the plan sponsor and the plan, having predictable processes and good, clear communication. Advisers are the main influencers in the decision, Harmon says, even more than third-party administrators (TPAs), since they talk to the plan sponsor and are very involved in the conversion process.

Common fears include lost files or dropped participants, Harmon says, but the reality is that the process is quite free of errors. “Today’s technology makes converting records a lot easier,” Harmon says. “There’s very little data input”–leaving little room for human error.

Plan sponsors should ask prospective recordkeepers to describe the conversion process. What is the communication like? Do they provide timelines? How predictable and consistent is the process? A key question to ask is how many of these conversions the recordkeeper does that are similar to the plan sponsor’s. “No one wants to be the beta test,” Harmon says.

Look for signs that a salesperson seems to be nodding automatically in response to requests. A plan sponsor might feel that certain plan features are important—multiple code sections or multiple plan designs—which might require manual workarounds by the recordkeeper. Harmon recommends asking for references from plans that do something similar.

Harmon believes a recordkeeper’s implementation strategy is a powerful part of its initial relationship with a plan sponsor and with the intermediary.






Terminated Plans Can Rollover Lost Participants


When terminating defined contribution plans, such as 401(k) plans, the inability to find participants with plan accounts has plagued plan sponsors and employers for years. The Department of Labor (DOL) has just issued guidance in Field Assistance Bulletin 2014-01 that outlines what is expected of plan fiduciaries and identifies rollovers to an individual retirement account (IRA) as the preferred option when the participant cannot be located.

A terminated plan must distribute assets as soon as administratively possible. There is a fiduciary duty to search for missing participants and beneficiaries. If a reasonable search is conducted and the participant or beneficiary is still missing, then the fiduciary must determine how to distribute the remaining plan balance.

In the last 10 years, both the Internal Revenue Service and the Social Security Administration have discontinued their letter-forwarding programs which had been used to locate missing participants. Employers have struggled with how much searching must be done and what to do with the accounts when the search proved fruitless.

First, the plan fiduciary should make reasonable efforts to locate the participants and beneficiaries using all of the following:

  • Certified mail
  • Check records of related plans and employer(s)
  • Contact designated beneficiaries to ask about participants
  • Use free electronic (Internet) search tools

Second, when account balances are large enough to justify plan expense, then the DOL suggests free or low cost Internet search services.

If the participant or beneficiary is not located, then the fiduciary should consider distributing the plan account directly to an IRA because the account will continue the deferral of income, and avoid both the 20% mandatory withholding and the 10% early distribution tax.

If rollover to an IRA is not feasible, the DOL suggests the fiduciary consider opening an interest-bearing federally insured bank account or transferring the plan account to a state unclaimed property (escheat) fund. The tax consequences of these accounts make them options of last resort.

The DOL explicitly calls the deposit of the entire plan account with the IRS in a "100% income tax withholding" as unacceptable. Some employers have done this in the past. The DOL now identifies this option as a violation of ERISA's fiduciary requirements.

For the benefit of plan fiduciaries terminating a defined contribution plan, the search steps should be documented. The new guidance can be the basis of a good checklist.







Ensuring Participant 401k and loan repayments meet DOL regulations

Rhonda E. Henry, CPA, APA | Audit | August 20, 2014

The Department of Labor (DOL) and Internal Revenue Service (IRS) have been focusing on the timeliness and accuracy of contribution and loan repayment deposits for the last ten years and will examine those transactions closely during an audit. Plan Sponsors and Trustees are responsible for ensuring the timeliness and accuracy of deposits. The most effective way to ensure that standards are met is to implement internal controls with set procedures. Examples of procedures are:

  1. Frequent payroll reconciliations - once a month (or every pay period), prepare a reconciliation of the payroll record totals to the total checks or ACHs issued, where any discrepancies are researched and resolved.
  2. Deposit with each payroll – make a practice of making a deposit every payroll period.
  3. Review and sign off on manual input – If the contributions and loan repayments are being input manually on the vendor website, conduct a second review to ensure that the amounts input are correct by Participant and by source.
  4. Reconcile totals with each pay period – with each payroll period, pull control totals from the payroll records to compare to the totals on the input at the vendor website, whether manual or electronic input.
  5. Annually, review total deferrals per the W-3 to a list of payroll periods with the pay date and related deferral amounts – make sure the totals agree, with any discrepancies researched and resolved. Compare payroll dates to actual deposit dates and research any delayed deposits.
  6. Cross-train employees on payroll deposit procedures – ensures that deposits are not delayed if the employee with primary responsibility is out on vacation or ill.

What is a late deposit? The DOL has issued guidance for “small” plans for the timing of payroll deposits, but has not yet issued the same guidance for “large” plans. The Plan Sponsor is expected to segregate the funds from company accounts as soon as administratively possible. This timing can vary depending on the company but generally the DOL and the IRS expect the Plan Sponsor establish a consistent pattern of submitting the payments to the investment provider.

Determining whether your Plan is a “small” or “large” plan is a year-to-year determination based on the number of participants as of January 1st for the year in question. A Participant is defined as any employee who is eligible to be in the Plan, regardless of whether he actually has a balance, plus any terminated employees with a balance. In general, a Plan with over 100 Participants is considered a “large” plan and the DOL will consider many factors in determining whether deposits have been made as soon as administratively possible, including reviewing historical deposit dates. For “small” plans, the DOL has provided a safe harbor of seven business days for deposits. Any deposit outside that timeframe is considered late, absent a compelling reason for the delay.

The internal controls necessary to ensure the Plan’s compliance should be designed to meet your company’s specific circumstances. Many contribution errors may be self-corrected. However, should the DOL or IRS uncover deposit timing errors or missed deposits upon audit, the penalties may be substantial.

The correction of late deposits is outside the scope of this article. If you discover late deposits, we urge you to contact your Third Party Administrator for assistance as soon as possible.






Small Business Owners Struggle with Retirement Prep

Aug 21, 2014 --- Many small business owners in the U.S. have trouble focusing on their own retirement preparedness, despite generally high levels of personal wealth and financial savviness. ---

A recent survey of professional financial advisers, conducted by CNBC and the Financial Planning Association (FPA), shows 42% of advisers believe their small business clients’ biggest financial challenge is developing a retirement plan and business ownership exit strategy. This is distantly followed by managing cash flow, cited as the top client concern by 23% of advisers in the CNBC/FPA survey. Other concerns cited as the top worry among small business owner clients included business tax issues (14%), securing affordable health insurance (6%) and raising working capital (6%).

The CNBC/FPA survey also revealed less than one-third of small business owners have worked with their adviser on a business ownership transition plan. And even among those that did, only one in four small business owners meet with their adviser to review their plan at least quarterly.

CNBC and FPA researchers suggest this lack of focus on retirement and succession planning may prove extremely problematic for the typical small business owner upon retirement. On average about 70% of a small business owners' personal wealth is invested in their business, with only 30% of wealth invested outside their firms. This suggests many small business owners could come up short on retirement income without an effective strategy for extracting equity from their business ownership stakes.

For many professionals who own a business, selling that business in the wrong environment may not provide the financial means necessary to adequately fund their own retirement. In addition, selling may not be in the business owners’ best interest, depending on a long list of economic factors. Other recent research suggests this is an especially prevalent problem among independent financial advisory business owners, who tend to significantly over-estimate the price they will be able to fetch from a future buyer of their practice (see “An Alternative to Traditional Succession Planning”).

The CNBC/FPA survey highlights the fact that more than half of the respondents (54%) felt their small business owner clients did not have enough protection against unanticipated risks, such as the owner’s sudden disability or death. Just 28% felt their clients were well protected.

Among those small business owners that have retirement plans in place, the most popular vehicles among small business clients polled are profit sharing 401(k)s (54%), followed by SEP IRAs (19%) and SIMPLE IRAs (12%).

The survey also shows financial advisers are using an array of insurance products to mitigate potential risks, including disability insurance (81%), liability insurance (73%), key man insurance (70%), health insurance (63%), property/casualty insurance (56%) and business interruption insurance (37%). Forty-seven percent of advisers who took the survey noted that only 20% of their clients had any succession plan in place to ensure a smooth management transition.

Financial advisers who participated in the CNBC/FPA survey pointed to three key initiatives small business owners and their financial planners should follow in order to secure their financial future. These are diversification, “prepare for the worst,” and “plan for succession.”

The CNBC/FPA survey was conducted May 12 to June 3 by the Financial Planning Association. It sampled 178 financial advisers nationwide that service small business clients ages 35 to 70. More information about the survey results is available here.