There are circumstances—mergers, acquisitions, and bankruptcies, among others—that cause companies to reevaluate and, in some cases, terminate their qualified retirement plans causing a 401(k) to rollover to an IRA.
Terminating a plan is a business decision, not a fiduciary decision. A company is not acting in a fiduciary capacity when it determines the future of its qualified plan(s). However, once it decides to terminate its plan, the plan’s administrator or, in some instances, another party, dons the fiduciary hat and proceeds to terminate the plan while acting on behalf and in the best interests of plan participants.[i]
For terminating plans, one of the fiduciary’s most important responsibilities is simply to let participants know the plan is terminating and how the plan will be distributing benefits. The plan administrator must notify all plan participants of the changes that are taking place, and receive distribution instructions from participants before initiating any distributions. It sounds like a straightforward task. Often, it is not.
The missing participant dilemma
When plans attempt to communicate with participants, they often discover that they cannot reach many of them. There are various reasons a participant can be unreachable (the industry refers to this as being ‘missing’ or ‘non-responsive’). A non-responsive participant may be a former employee who has changed residence or marital status and failed to notify the plan, for example. One expert has suggested that 10 percent to 15 percent of a typical plan’s data is outdated or of poor quality, making it difficult to contact all participants.[ii]
When participants are missing or non-responsive, steps must be taken to find them. Department of Labor (DOL) issued Field Assistance Bulletin (FAB) 2014-01 updated guidance for locating participants of terminating defined contribution plans. At a minimum, plan administrators must: [iii]
- Send notices by certified mail
- Check other plan and employer records for the participant
- Contact the participant’s designated beneficiary
- Use free electronic search tools
After a plan administrator exhausts these options for finding missing participants, the accounts can be rolled over into individual retirement accounts (IRAs), interest-bearing bank accounts, or a state’s unclaimed property fund.
The preferred choice: 401(k) rollover to IRA
One reason IRA rollovers may be a preferred distribution option is because state escheatment laws can make non-responsive account holder’s assets more likely to be claimed by the state. Also, IRA rollovers may be more likely to preserve former participants’ assets than other options because they are tax-deferred accounts and funds rolled into the IRA will continue to grow tax-deferred.
Rollovers appeal to many plan sponsors, as well, because the DOL safe harbor for automatic rollover IRAs provides a way for them to reduce plan costs, simplify plan administration, and preserve missing participants’ retirement savings while minimizing the plan’s fiduciary liability.
Choose your IRA custodian carefully
Plan sponsors and other fiduciaries must exercise caution when choosing an IRA provider. According to FAB 2014-01, “the choice of an individual retirement plan requires the exercise of fiduciary judgment with respect to the choice of an individual retirement plan trustee, custodian or issuer to receive the distribution, as well as the choice of an initial investment in the individual retirement plan.”
Before selecting a custodian, plan sponsors or trustees may want to ask question specific to their business circumstances. These questions may include:
- Is there an account minimum?
- How many rollover accounts can your firm accommodate?
- Do you continue to seek missing participants?
- How do you do it?
- Will you accept rollovers from Roth 401(k) plans or allow Roth conversions?
- What transfer and administration technology do you employ?
- What is your experience with automatic rollovers?
A solution that makes sense
IRA rollovers are an invaluable part of many qualified retirement plan termination processes. They make it possible for plan fiduciaries to preserve missing and non-responsive participants’ plan assets in tax-advantaged accounts. In addition, they make it possible for plan sponsors to successfully terminate qualified plans before a merger or acquisition is completed, permit trustees to efficiently administer plan terminations as part of bankruptcy proceedings, and help QTAs to complete abandoned plan terminations.
[i] United States Department of Labor, Meeting Your Fiduciary Responsibilities, cited November 2015 [http://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html] [ii] Millennium Trust Company, “3 Solutions to the Missing 401(k) Plan Participant Issue.” [iii] U.S. Department of Labor, Field Assistance Bulletin No. 2014-01, August 14, 2014
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.
