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Pending Divorce; Form Standing Order, No QDRO

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Grateful for Help on this Question: Can a Plan Administrator or TPA refuse to process a rollover request from a plan participant where the participant is a party to a pending divorce and an automatic standing order is in place?

Background:

1. The participant wife is in a pending divorce that has been going on for some time. As is the case for all divorces in this jurisdiction, a standard form “Automatic Domestic Standing Order” went into effect when the divorce was filed. The Standing Order, by its terms, is binding only on the parties to the divorce. The Standing Order is not a QDRO, does not direct the plan fiduciaries to do or refrain from doing any act, and does not specifically mention the Plan. The closest thing that the Standing Order addresses regarding the 401(k) Plan is that it prohibits certain transfers or trading of property located in the county if such transactions are not in the ordinary course of business.

2. Husband and wife were previously employed by the same family business and are participants in 401(k) Plan. Husband is trustee of the Plan and sole owner of the Company that is the Plan administrator. Wife previously rolled over a portion of assets in Plan from prior employer and is 100% vested in her 401(k) account. As wife is no longer employed by Company, she filled out the proper forms with the TPA to initiate a direct rollover of 100% of her account to another 401(k) account set up at another institution. The TPA notified (but did not formally forward the rollover request to) the husband/trustee/administrator who objected.

3. The TPA stated that the distribution request cannot be honored citing the following:

a. If the Plan Administrator is on notice (verbal or written) regarding a pending domestic relations action (e.g., a divorce) and has a reasonable belief that the participant’s account may become subject to a QDRO, the Plan Administrator may suspend processing the participant’s distribution or loan requests pending resolution.
b. The Standing Order puts The Retirement Plan Company (TRPC) on notice that a divorce is pending and prevents both parties from trading any of the assets, which arguably is what would be done in a rollover distribution from the Plan.
c. It appears the retirement assets of both parties are marital assets subject to equitable division by an adjudicating judge in a divorce proceeding.  It is quite possible that either parties’ retirement assets could become subject to a QDRO.  As such, no distributions should be made to either party until there is a modification to the standing order, or other such direction by the relevant court (e.g., a QDRO), which should specifically address allowing distributions and rollovers from the retirement plan accounts.

Is the TPA taking on a fiduciary role in refusing to forward the rollover request to the Plan Administrator?

 

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There is a lot going on that I would inquire about if presented with this matter and nothing is revealed about the terms of engagement of the TPA, but I will accept your conclusions, overlook the omissions, and limit my response to your very focused question with a very focused observation:  Forwarding a distribution request to the Plan Administrator/Trustee (presumably one person wearing two  fiduciary hats, but that detail is uncertain) seems like a ministerial act.  The refusal to carry out a purely ministerial act seems to be based on the exercise of of interpretation and judgment.  Exercise of discretion (choosing to act or not act, or how to act) and judgment are hallmarks of a fiduciary.  One can be a fiduciary by acting like a fiduciary, whether or not one is formally designated as a fiduciary.

Nothing further should be inferred from the observation, especially not anything related to consequences or anything related to what the expected or appropriate action by the Plan Administrator/Trustee would be.

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As divorces are common and they typically come with an automatic standing order, does this constitute a legal basis to freeze the account and prevent an otherwise standard rollover request?

After separation of employment, does a participant (with a pending divorce) have a right to rollover (or at least have the right for a fiduciary to consider the rollover request)?

Do you think that the TPA's "exercise of discretion," judgment, and interpretation in denying/refusing to forward a rollover request is a ministerial act or constitutes assuming the role of a fiduciary?

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My apologies if my observations are not useful - as they don't go to answering your question - 

As a practical matter - I would think the plan administrator has a right to all plan records. Surely the paperwork for the rollover request is a plan record - and the plan administrator has a right to receive a copy. If the rollover request was made on paper - has the plan administrator demanded a copy from the TPA?

If the request was made online - such as through a participant portal on a recordkeeping platform - the Plan Administrator may need to contact the recordkeeper(hopefully different from the TPA) to request a copy of the records. Or usually they can simply log on and download the information. 

And then the request can be evaluated / approved/ processed/ denied etc. hopefully without the TPA's involvement. 

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Not sure if the rollover request got forwarded but the TPA said at one point that it wasn't going to forward the rollover request to the Plan Admin because of the TPA's determination that the automatic standing order prevented trading the account.

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25 minutes ago, ERISAlaw said:

... the TPA's determination that the automatic standing order prevented trading the account.

Actuary/non-lawyer opinion:  Unless there is precedent and/or legal interpretation for this,  the TPA might be exceeding its authority to make such determination.

But I could be wrong.

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40 minutes ago, david rigby said:

Actuary/non-lawyer opinion:  Unless there is precedent and/or legal interpretation for this,  the TPA might be exceeding its authority to make such determination.

But I could be wrong.

I think the TPA is absolutely wrong; the paperwork should be forwarded.  The Plan Administrator is in charge; not the TPA.  A discussion should be had between the TPA and the PA explaining all the info above, but it is up to the PA to decide how to handle this.  I think the recommendation to NOT do the rollover because of the pending divorce is correct, but it is the PA's decision to make, not the TPA.

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Unless a plan's written QDRO procedures provide otherwise (which many do*, although they should not unless they like trouble), the plan conducts business as usual unless the plan  (including an agent of the plan) receives a domestic relations order -- not hears about one, smells one, or infers one.  If a terminated participant is entitled to a distribution, then a distribution should be processed in accordance with usual plan procedures.

If the Standing Order has been delivered to the plan, then the plan should follow its procedures for processing a domestic relations order (we know it does not meet the requirements).  This is the same approach as can be taken with the travesty California Joinder Orders. The plan has a reasonable time to determine whether or not the standing Order is qualified, and will not make a distribution pending its decision.  Who knows what a reasonable time is, exactly?  With any luck, a "real" domestic relations order that want to be a QDRO will be received within a reasonable time and then things are back to normal.  If not, then the QDRO fiduciary (probably PA)  will have to take appropriate action on the Standing Order, which will involve allowing a reasonable time for that action to be appealed by the aggrieved person and no distribution will be made pending the decision on appeal.

The circumstances are complicated because a plan fiduciary is a party to the divorce and presumably has knowledge or receipt of the Standing Order?. Is that receipt by the plan?  I would prefer not to argue that it is not receipt by the plan.

Forget about the rollover, analytically.  Rollover is merely something that can happen to certain distributions.  It is only a distraction in this matter.

I agree with Larry Starr that this should be overseen by the plan administrator, even if the plan administrator is clueless and reliant on the TPA for everything (which is why TPAs get out of their lane too often).  Be careful who you choose as advisers.

*Misguided by incorrect informal Department of Labor guidance about the law.

 

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