What You Need to Know
- The Labor Department rule will likely make it easier to wind down pension plans abandoned when the employer shuts down or a small-business owner dies.
- The department has been trying to address major problems in the abandoned plan process for years, former EBSA head Phyllis Borzi says.
- The current process allows court-appointed trustees to claim high fees from the plans and financial institutions to delay resolution, she says.
The Labor Department has filed with the Office of Management and Budget a rule proposal that would likely make it easier to wind down pension plans abandoned by employers and give plan participants access to their benefits.
Plans may become abandoned ”when a company goes out of business or the owner of a small business dies,” ERISA attorney Fred Reish of Faegre Drinker explains.
The Labor Department has been wrestling with this topic for years, a former Obama administration official says.
The notice at OMB states that Labor’s proposed rule amendments by its Employee Benefits Security Administration (EBSA) would likely deal with termination of and distribution of benefits from individual account pension plans that have been abandoned by their sponsoring employers, as well as amendments to permit bankruptcy trustees to use the Labor’s Abandoned Plan Program to terminate and wind up the plans of sponsors in liquidation under Chapter 7.
The Abandoned Plan Program ”finds fiduciaries of abandoned plans and forces them to find the participants and distribute their benefits,” Reish explains. If the fiduciary can’t be found, an independent fiduciary is appointed in court, he said.
Labor filed the notice at OMB on Wednesday. OMB reviews typically take 90 days. The rule proposal is listed as an Interim Final Rule, which is subject to further revision.
“While the rule text hasn’t been released, an educated guess might be that it finalizes permission for bankruptcy trustees (or their designees) to terminate defined contribution plans whose sponsors are in liquidation under Chapter 7 and to distribute the benefits to participants pursuant to Labor’s Abandoned Plan Program, while collecting appropriate fees for these services,” Mark Iwry, former senior advisor to the U.S. secretary of the Treasury for national retirement and health care policy who’s now a nonresident senior fellow at the Brookings Institution in Washington, told ThinkAdvisor Thursday in an email.
While Labor’s filing at OMB “is not directly part of the Labor Dept.’s new task of establishing a Lost & Found under Secure 2.0,” Iwry said, “both projects will help reunite participants with their retirement benefits when either the participant or the benefit has temporarily gone missing.”
The Senate Appropriations Committee last week “approved $14M to fund other program activities designed to further this general objective,” Iwry added.
Phyllis Borzi, former head of EBSA, told ThinkAdvisor in an email Thursday that while it’s unclear what Labor’s plan actually is, EBSA was working on this topic while she was at Labor. The topic was “very important to the participants in abandoned plans who generally could not get access to their retirement benefits until and unless a trustee was appointed who actually formally terminated the plan,” Borzi said.