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Regulation and Compliance > Federal Regulation

Lead generation and terminating pension plans

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It’s easy to use FreeERISA’s 5310 database of terminating pension plans to generate leads in your market.

This article summarizes ideas for contacting leads and turning them into participants you can counsel and rollover assets you can capture. Keep in mind that many “5310 terminations” occur when a company changes from one type of plan to another, such as converting from a defined benefit or money purchase plan to a profit-sharing or 401(k) plan.

From a plan fiduciary’s perspective, there are two separate areas of responsibility regarding terminations. One involves handling money. The other involves notifying participants of their rights and options.

In terms of handling money, a plan technically does not terminate until the last distribution is made. However, this event occurs at the end of a long chain of complex requirements involving participant notification.

Changes in U.S. tax laws have made this chain even more difficult for plans to manage. For example, the law and IRS regulations have created an excise tax, which applies when a plan administrator fails to provide timely notice prior to the effective date of any plan amendment that provides for a significant reduction in future benefit accruals.

The excise tax is assessed at the rate of $100 per participant per day. It applies to all plans subject to Section 204(h) notification requirements of ERISA, including defined benefit and “individual account” plans subject to minimum funding requirements.

Under an IRS Revenue Ruling, when a money purchase plan is partially terminated and its assets are converted to a profit-sharing plan, the notice requirements of 204(h) do apply.

Section 204(h) notification is one of the most difficult compliance burdens in pension law, because it mandates that notification be made within a “reasonable time” (usually 45 days prior to an amendment’s becoming effective) and in a manner “calculated to be understood by the average participant.” It’s not enough to post notices on bulletin boards and company Web sites. Section 204(h) also contains “receipt requirements” that specify acceptable delivery to each individual.

Aside from 204(h), which does not require action on the participant’s part, terminating defined contribution plans must notify participants of their right to receive plan money in four ways:

  • Outright distribution.

  • Rollover to a new company plan, if one if offered.

  • Transfer or rollover to an IRA.

  • Transfer to an annuity, for participants who do not choose one of the three options above.

A participant in a terminating defined contribution plan is generally entitled to immediate vesting of all employer contributions, and the participant may not be forced to roll over money to a new company plan. In selecting the “default choice” of an annuity, the plan administrator or trustee is subject to ERISA fiduciary requirements. Participants may not elect an IRA rollover within 30 days of the time they have been notified by the plan of their ability to make a direct IRA transfer, unless this right is waived. 

What Plan Sponsors Need

Given these complex rules, what do most companies want in their “participant notification” campaign?

They need help from professionals who fully understand all applicable laws and regulations.

If a terminating plan is being replaced, they usually want participants to elect a transfer of assets to the new plan, while also understanding their rights and choices.

If the terminating plan is not being replaced, they usually want participants to make direct transfers to an IRA of their choice, based on professional guidance. They don’t want the fiduciary responsibilities of making an annuity default choice. Some companies don’t want “salesmen” involved in this process. They want objective, unbiased communicators and educators.

Given the complexity of notification requirements, especially 204(h), you should team up with an ERISA attorney to deliver the participant communication that terminating plans need. The attorney should prepare a time line of all important notification events and deadlines and review all participant communications prior to release. You should work closely with the company to implement the timeline and coordinate communications.

What You Want from the Company

  • In return for helping companies manage the notification process, you want them to give you one or more of three advantages:

  • A list of plan participants with some contact information (phone or address).

  • Help in communicating information about your services.

  • An introduction or endorsement from a top company executive.

These advantages can be offered in many forms.

For example, some companies provide a full list of current participants with “census data” such as plan balances. Others may hand you a plain company directory. Some companies allow qualified financial advisors to meet participant groups in the cafeteria during the lunch break. Others won’t go beyond posting an announcement of your meetings held off-site.

 Your role in managing the notification process is valuable, and you should negotiate advantages that give you an opportunity to meet participants directly, so you can do the job right.

Emphasize to company executives that it only takes a few discontented participants to stir up trouble all over the company. Your job is to increase the level of confidence and satisfaction among all participants.

Going Around the Company

If a plan with 100 or more participants in your market is terminating, and you can’t make inroads with the company, don’t give up! Participants need your help to make sound retirement decisions, and their interests don’t always align with those of the sponsor. In some cases, you can gain valuable rollover clients and do the best job for them when you don’t work with the sponsor’s blessing.

The most ethical way to reach employees directly is to be referred to them by another individual (such as an existing client) and contact them at home, not work. Do a great job counseling one individual on all choices available. Once you know that person is satisfied with your services, ask for referrals to others. Soon, you can build a referral network among many participants in the same company. Workplace referrals can be powerful, especially if there is resentment against the company for terminating a plan or providing too little communication.

In some cases, companies put pressure on workers to sign releases or waivers so they can accelerate the notification process. Whether or not you have the company’s blessing, let participants know that they should not sign any such documents before they clearly understand all rights and options available. Offer to spend 30 minutes explaining rights and options to every participant, down to the lowest paid, and you will gain respect and referrals.

The Participant Is King

Despite the new notification requirements, the needs of the individual participant continue to fall through the cracks in plan terminations. In many cases, that happens not because companies are insensitive or greedy but because they are short-handed and time-pressured.

Your job is to make each individual participant the “king” of the termination process. Your message should be that nothing is more important than having each participant depart the plan informed, confident and satisfied.

If you will use FreeERISA’s 5310 database to identify terminating plans in your market, and then do that job and deliver that message, your work will be appreciated and rewarded with rollover business.