The Department of Labor’s Employee Benefits Security Administration (EBSA) issued a proposed rule and a related class exemption on Tuesday designed to make it easier for Chapter 7 bankruptcy trustees to distribute assets from bankrupt companies’ retirement plans. The proposal would allow such trustees to use EBSA’s existing Abandoned Plan Program to terminate, wind up and distribute benefits from such plans.
The existing Abandoned Plan Program provides streamlined termination and distribution procedures for abandoned individual account plans, including 401(k) plans, under which benefits may be distributed in a manner that can substantially reduce fees charged to participants’ accounts for, among other things, annual reporting, legal compliance and other administrative services, including termination costs.
EBSA explained in a release announcing the proposed rule that “by making this streamlined process available to Chapter 7 bankruptcy trustees, the time and resources required to ‘wind up’ a bankrupt company’s retirement plan can be significantly reduced. As a result, plan participants likely will see fewer administrative and termination fees charged to their accounts and should have access to their money sooner.”
Phyllis Borzi (right), assistant secretary of labor for EBSA, said in the release that the proposed rule is designed “to help workers and retirees of bankrupt companies gain access to their retirement money sooner. Far too often, the retired workers of these companies are unable to obtain their hard-earned retirement savings in a timely way.”
The legal status of a former employer, she continued, “should not impede retirees’ access to their own funds, especially at the very time they need them most. The proposed rule would extend the department’s current Abandoned Plan Program to these retirement plans, and enable Chapter 7 bankruptcy trustees to more quickly and efficiently distribute retirement benefits to participants. The rule also would reduce the possibility of participants’ accounts being eroded by excessive and unnecessary fees.”
EBSA explains that under amendments in 2005 to federal bankruptcy law, if a company in liquidation administered an individual account retirement plan, the company’s Chapter 7 bankruptcy trustee must perform those functions. The Abandoned Plan Program, established in 2006, “provides specific guidance on when a plan may be considered abandoned, who may make that determination, and exactly how to terminate the affairs of the plan and make benefit distributions.The program also limits potential fiduciary liability of financial institutions that step in to terminate and wind up plans that have been abandoned by their sponsors,” EBSA says.