DOL Looks to Rescue Orphans

The U.S. Department of Labor (DOL) has a rescue mission in place for orphans–that is, the more than 1,650 401(k) plans holding close to $900 million in assets that are abandoned each year, sometimes due to a company merger, a dot.com bust, or a spin-off.

The proposed rules attempt to provide standards for reuniting workers with their retirement savings, rather than approaching each orphaned plan on a case-by-case basis, as is now the practice. Under the proposal, a plan in which no contributions or distributions had been made for at least 12 consecutive months would be classified as abandoned.

Further, reasonable efforts must be made to locate the plan sponsor to find out whether the plan is still viable. This would be determined by a “qualified termination administrator” (QTA), the body that holds the plan’s assets and is considered a trustee or issuer of an individual retirement plan, such as a bank, trust company, mutual fund family, or insurance company. Usually the custodians are left holding the assets of these abandoned plans but do not have the authority to terminate them and make benefit distributions.

The proposed rules would require the QTA to have IRA accounts set up for all participants who do not respond to attempts to find them, regardless of an account’s size.

A potential problem with this scenario, according to Jan Jacobson, director of retirement policy for the American Benefits Council, is that some accounts may be so small–below $1,000–that banks and investment companies may not want them, and the QTA left holding the bag may balk at the process.

If the account is set up with the QTA, fees would be limited to the amount of income earned by the account under the prohibited transaction exemption, Jacobson explains.

However, the new proposals are “an improvement on the case-by-case basis because, until now, financial institutions could not terminate and pay out distributions from an abandoned or orphaned plan.” Many participants could not access their retirement funds. The financial institution that isn’t the actual fiduciary of the plan or the plan participant herself had to go to DOL “and wait for them to do something,” which sometimes meant going to court.

According to the DOL proposal, QTAs must notify the Employee Benefits Security Administration before and after each stage in the process of finding and notifying participants, giving them their benefits and terminating and winding up a plan. The new policy will be used by some financial institutions to terminate some plans, Jacobson acknowledges.

However, in some cases, more than one institution holds plan assets and there is some concern that an institution wouldn’t be willing to take on potential liability for assets held at another institution. The proposed guidance does not allow termination of the plan by more than one entity, something the American Benefits Council wants to see changed in the final guidance.