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Regulation and Compliance > Federal Regulation > DOL

DOL Rule on Abandoned Retirement Plans Arrives at OMB

By Melanie Waddell

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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.

Big Problems

While at EBSA, Borzi said Labor was attempting to address “two big problems” in this area.

First, “financial institutions that were custodians of the funds were more than happy to let the plan assets sit and dutifully claim their administrative fees until the assets ran out,” Borzi said. “They often claimed that they had no authority to terminate the plan and the procedure under EBSA’s abandoned plan program either didn’t authorize or require them to terminate the plan.”

As to employer bankruptcy, “the Bankruptcy Code required the bankruptcy court to appoint a trustee as plan administrator,” Borzi explained.

“In those cases, the courts allowed the appointed trustees to determine what they would charge for their services (although the court was supposed to approve the request, the staff learned from advocates for plan participants and others familiar with the situation that courts rarely challenged the requested fee and routinely approved the bills as presented, even if the trustee sat on its hands for months while continuing to claim fees.”

Borzi continued: “Because they typically were lawyers, they charged very high hourly rates for virtually no actual services. To the extent that the administrative services [were] necessary to terminate and close out the plan, they were generally performed by lower level admin folks in the law firm, while charging fees as if the senior partner was filling out and filing the necessary forms.”

Once again, Borzi added, “the assets of the abandoned plan could easily be siphoned off with little or nothing left for the participants. The bankruptcy bar didn’t want to use the Department’s abandoned plan program because fees were in essence capped (I think the regs said the trustee can only charge reasonable fees based on the services provided). It was pretty easy to fix the first problem but as much as we tried to accommodate the concerns of the bankruptcy bar, their vehement objection to any limitation to what they could charge created internal Administration problems with the DOJ’s bankruptcy folks over whom these lawyers apparently had influence.”

During her time at EBSA, Borzi said, “there were also a lot of relatively minor uncontroversial changes that we planned to propose.”

Towards the end of the Obama administration, EBSA “had to move this project down the regulatory agenda because there were other reg projects that were higher priorities of the Secretary and the Administration that we had to complete,” Borzi relayed. “Since the career folks had spent years trying to seek a compromise and prospects didn’t seem very good for a quick resolution, it seemed the wise choice at the time.”

That being said, “the problems are real and I am really glad that EBSA was finally able to propose something,” Borzi added. “I look forward to seeing what is in the proposal.”

Melanie Waddell

@Think_MelanieW

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