While the precise nature of any changes and the timing of implementation have yet to be finalized, proposals suggest that a ‘modernized’ Form 5500 will compel plan sponsors to deliver a trove of information—some of it new—in formats that facilitate data mining.
The new Form 5500 has the potential to be a double-edged tool that both benefits plan sponsors and exposes plan vulnerabilities.
With a more complete set of data available, assessments by various public and private organizations could help plan sponsors, providers, fiduciaries, and participants by:
- Improving benchmarking across plan sizes, types, and industries, which could reduce litigation exposure.
- Providing greater clarity on fees, revenue sharing, investment choices, and other plan characteristics and provider services.
- Offering actionable information regarding the impact of investment options and plan structures on participation, performance, and retirement outcomes.
The sharper edge of modernization may be an improved ability to identify anomalies and compliance issues.
Considering the current level of enthusiasm for defined contribution plan lawsuits, formulating compliance strategies to reduce or eliminate Form 5500 vulnerabilities is a priority for many plan sponsors, consultants, and advisors.
One area of interest appears to be the treatment of missing and non-responsive participants’ balances, as well as the processes that plan sponsors have put in place to find missing participants and safeguard their balances.
Related, will be questions related to RMD calculations and distributions to missing participants.
It is also expected that new questions, proposed for Schedule H (financial information), will request data about uncashed distribution checks; an issue plan sponsors have addressed (or not) without clear regulatory guidance for many years. The questions may require plan sponsors to:
- Disclose the number and value of uncashed participant checks. In aggregate, the answers are expected to shed light on the magnitude of the uncashed check issue.
- Share written plan procedures documenting the treatment of uncashed checks, thus, raising awareness among plan fiduciaries about the importance of having processes in place. The issues involved may include compliance with IRS reporting and withholding procedures and Form 1099-R filings and updates.
The simple reality is that uncashed check amounts remain plan assets, and plan sponsors retain fiduciary responsibility for those assets. Uncashed checks can increase plan costs, complicate plan administration, and expose plan fiduciaries to additional liability.
There are ways to avoid the potential headaches associated with the issue.
For instance, plans with automatic rollover provisions may choose to have all small balance accounts rolled into Safe Harbor IRAs instead of sending distribution checks to participants with balances of $1,000 or less.
Plans that have not yet adopted Safe Harbor automatic rollover provisions should consider the option. Plan documents should be modified to establish processes that are grounded in best practices.
Automatic rollovers of uncashed check balances offer a slew of benefits. They may help plan sponsors and recordkeepers resolve several issues with the potential to result in significant liabilities.
- First, automatic rollover IRAs remove lost and non-responsive participants’ accounts from plans, helping plan administrators maintain clean plan data.
- Second, moving assets to Safe Harbor IRAs preserves the tax advantages conferred by qualified retirement plans so former participants assets remain intact.
- Third, automatic rollovers may help reduce Form 5500 red flags that might trigger audits.
- Fourth, removing small accounts and uncashed check assets may help reduce plan costs, limit fiduciary liability, and simplify plan administration, including Form 5500 preparation.
- And most importantly, IRA providers have the tools to search and find the participants.
A final version of the modernized Form 5500 is expected by 2019, although the process may be delayed until a new head for EBSA has been appointed. Additionally, the DOL’s plate is very full.
In the meantime, plan sponsors should work with their plan’s service providers to better understand the ways a modernized Form 5500 may affect their plans, and develop compliance strategies that protect the plan and its participants.
Terry Dunne is senior vice president and managing director of Retirement Services at Millennium Trust Company, LLC. Dunne has over 35 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.
