termination distn fees

[Guest billy bong]

looking to see how other TPA's handle the following:

plan has 1000+ participants with 3 sources of contributions in individual accounts.

non-elective forfeitures were previously reallocated to eligible participants resulting in very small balances for those not deferring.

problem:

when distributing small amounts ($1-50), we end up having to charge our termination fee of $25 since we have to process paperwork so the investment company will release the money. there's no getting around the paperwork since the $$ is in individual accounts.

many some account balances are less than $10.

how are other TPA's handling this issue? do your clients complain that they are being charged $x for a distn that is less than the fee?

look forward to input from other TPA's.

bill

[Guest boberlander]

After explaining the situation, I've had clients take either more or all of the distribution form responsibility upon themselves for these small balances.

Also, they then are more receptive to amending plan provisions so things like reallocated forfeitures to terminated participants don't happen.

[Guest James Osterhaus]

If a participant has less $$ than our distribution fee, we don't do a distribution for them. We ask the investment company to move their money into the forfeiture account.

[Guest bschulze]

My understanding of this very confusing issue is that the DOL does not allow the sponsor to charge a distribution fee to the participant at all. Thus, the plan has to pick up the expense.

[Kirk Maldonado]

What if there is only one participant left in the plan? What is the difference in that case between the plan bearing the cost and the participant bearing the cost?

[Guest bschulze]

From a practical point of view, there is no difference at least to the last participant. Even worse, the last participant would have had to absorb porportionally a lot more of the cost of other exiting participants. Nevertheless, isn't it a legal question rather than a practical one? Quite frankly, logic would dictate charging the exiting participant a fee, but again my understanding was that participants could not be charged for specific rights such as receiving a distribution in a plan rather than optional provisions such as a loan.

[Guest consultant]

If the participant has a balance less than our fee, we forfeit the funds. As for the distribution fee, it can be charged as long as the participant is made aware of it before the fact. The DOL has a real problem with fees which are not disclosed or are disclosed at the time of the transaction. It is a participant transaction and can be paid by the participant. - You are referring to a participant payout expense? Not a plan termination and distribution fees?

[Guest boberlander]

Don't you think that payout from the plan before NRA is an optional benefit?

[Guest consultant]

It could be an optional benefit if initiated by the participant and could be dependent upon how and when distributions are stated in the document. Also, billy did not state if the distributions are participant or plan sponsor initiated. If the participant has elected a distribution and is then paid out, the plan allocates forfeitures and the ex-participant now has a balance again, then the plan sponsor wants to payout this balance, this would not be an optional benefit election. Billy, was your firm paid a distribution fee on the balances paid out previously? If so, the DOL allows the payment of fees for fair compensation. They do not like fees which equal or exceed benefit payments. If the balance is $75 or less, we forfeit it. You can also pay it out later if needed rather than take the chance of some ex-participant receives a check for $5 for funds he did not know about and a statement showing a withdrawal charge of $25 or $50. It will probably generate a call to the DOL.