While 401(k) plan fiduciaries have diligently addressed fees, investment menus, and transparency, the regulatory ground shifted beneath their feet.
Government regulators and litigation attorneys have begun to focus on different aspects of fiduciary responsibility, including missing participant searches, unclaimed asset transfers, plan loans, and cybersecurity processes.
1. Missing participant searches
One of the most challenging aspects of plan administration—and one of the most important—is maintaining up-to-date participant data.
All too often, plan sponsors or administrators have inaccurate contact and beneficiary information. By one estimate, 6% to 7% of 401k plan participant data is outdated or inaccurate.
When it comes to retirement security, poorly maintained plan data can become a significant issue.
In a November 2014 report, the United States General Accounting Office (GAO) found that from 2005 through 2014, “…25 million participants in workplace plans separated from an employer and left at least one account behind and millions left two or more accounts behind.”
In total, the value of unclaimed retirement savings in the United States has been estimated by the GAO in a January 2019 report to exceed $100 billion.
That may help explain why the Department of Labor (DOL) has begun to audit plans with an eye toward missing participant search processes.
In the absence of definitive guidance, many plan fiduciaries have been adopting one of two options. Either they have worked with plan providers, consultants and advisors to develop internal search processes, or they have identified external resources and outsourced search processes.
2. Unclaimed asset transfers
Some plan sponsors have opted to transfer missing participants’ assets to states as unclaimed property.
In its Field Assistance Bulletin No. 2014-01 (FAB 2014-01), the DOL cites this as a distribution option (although not its preferred option) for terminating 401k plans, although the DOL has not provided guidance in this area for active plans.
The GAO studied the value of retirement assets in unclaimed property funds. In January of this year, the agency reported that millions of dollars in retirement assets are in state coffers.
The report stated:
“Survey data provided by 17 states show that, in 2016, they collectively received approximately 54,000 transfers of retirement savings worth about $35 million. Because transfers occur every year, the cumulative dollar value of savings held by states is larger than the amount transferred during the one year…”
Depending on the state’s unclaimed property laws, if an account owner does not take mandatory distributions (required minimum distributions at age 70 ½) the assets may be deemed abandoned and transferred to the state after the applicable dormancy period has expired.
The GAO did not make any comments about the choice from a fiduciary perspective; however, it did encourage the IRS to clarify rules related to tax withholding and future rollovers of claimed assets. These issues could become the focus of future audits.
3. Plan loans
As concerns over Americans’ retirement security intensify, plan loan defaults may receive greater scrutiny.
Many 401k plan sponsors allow participants to take loans from retirement savings accounts. Usually, loans must be repaid within five years.
When a loan is not repaid, the participant is in default, and must pay the IRS taxes and penalties on the loan amount.
A 2018 Deloitte analysis suggested plan loan defaults had the potential to cost plan participants more than $2 trillion over the next 10 years. The estimate included the cumulative effect of loan defaults, the cost of taxes and early-withdrawal penalties, the loss of potential earnings and other associated issues.
Using historical loan default data and assumptions from sources like the Pension Research Council, Vanguard and the DOL, Deloitte estimates a loan default could cause the average participant who takes a loan to sacrifice as much as $300,000 in retirement assets during his or her working years.
“What [plan sponsors] may not recognize is that participant loans are plan investments and must be managed with the same prudence and oversight required for any plan investment,” Drinker Biddle & Reath’s Bruce Ashton explained. “The risk is heightened by several factors: the increased focus on 401k plans as a source of litigation; an alarming rate of loan defaults, as reflected in academic and industry studies; and a misguided belief that disclosure provides adequate protection.”
4. Cybersecurity
Cyberattacks on retirement plans are a relatively new occurrence, but the threat is so great it would be difficult to overstate.
This new hazard has gained the attention of legislators. Earlier in the year, members of the U.S. Senate Committee on Health, Education, Labor & Pensions and the House Committee on Education and Labor recently asked the GAO to take a closer look at cybersecurity measures being implemented in the private retirement system.
As with other areas of plan management, DOL guidance regarding the fiduciary responsibility for cybersecurity has yet to be provided. Industry leaders have developed resources that can help plan sponsors determine a prudent course of action, including the Pension Research Council’s white paper entitled, “Benefit Plan Cybersecurity Considerations: A Recordkeeper and Plan Perspective,” and the SPARK Institute’s best practice recommendations.
Helping Americans accumulate enough assets to live comfortably throughout retirement is a constant battle. Plan sponsors are field officers on the front lines, subject to rules of engagement established by a variety of commanders.
It’s critical to have a thorough understanding of fiduciary issues and to have the right team in place to ensure fiduciary obligations are met.
Terry Dunne is senior vice president and managing director of Retirement Services at Millennium Trust Company, LLC. Mr. Dunne has over 40 years of extensive consulting experience in the financial services industry. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.
Before retirement, Terry Dunne was the senior vice president and managing director of Retirement Services at Millennium Trust Company, LLC. Mr. Dunne has over 40 years of consulting experience in the financial services industry. He has written extensively on retirement planning, industry trends, technology, and legislation. Millennium Trust performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.
