Paperless 401(k) Employment Termination Distributions?

[Guest FREE401k]

We are a 401(k) TPA, and are exploring paperless employment termination distributions for the 401(k) Plans we administer. Right now participants fax or mail us a form to request a distribution. Is anyone handling this process paperless?

[Guest Jim Kais]

There are plenty of providers administering distributions (especially due to termination) in a paperless environment. What do you want to know specifically?

[Guest FREE401k]

Jim: Thanks for the response - specifically, we're curious about security issues. Currently in our firm, if a 401(k) Plan participant has $5000 or over in the Plan and wants to take an employment termination distribution, they must submit a signed form (under $5000 we auto rollout). We'd like to use our website and/or voice response system to handle these requests but wonder about the acceptable standard for security. Do other practitioners let participants request distributions over the phone or web, and feel that the fact that the phone or web must be accessed by a username and PIN is enough security? I don't know why we feel "safer" when we have a signed piece of paper in our hand, but for some reason we are struggling with the idea of not requiring the signed distribution request, and wondered what others in the industry are doing. The several colleagues I've asked outside my firm all still require paper.

[Guest Jim Kais]

Generally, most practioners feel that they have ample security because of the use of a username and password for websites with 128-byte encryption. Distributions via a call center representative on the other hand are usually administered on a recorded line. A plan fiduciary or authorized signer can only enact plan distributions on behalf of the participant - historically, this was obtained by many practioners (and still is in many cases) on paper.

In an automated environment, it is absolutely necessary to ensure that your clients are submitting their payroll data in an efficient manner. The level of sophistication of your clients will ultimately determine the success of your automation effort and furthermore, the cost to run your business. Automation will also, in many cases, reduce your client's internal costs.

Usually, clients will submit termination dates and status codes through their payroll interface file. Essentially, the client, by submitting this information to your firm is authorizing the future distribution due to termination. Once you post the indicative data updates to your Recordkeeping system, your call center reps should recognize that the participant is, in fact, terminated and proceed with obtaining rollover instructions or payout options over the recorded line. Plans with a QJSA provision or with spousal consent requirements can be handled, but you have to be very careful with your disclosures for QJSA as well as obtaining notarized signatures if the plan requires spousal consent prior to releasing a check.

If that turns your stomach and if you have a client base that resembles the small or micro market (less than 100 ppts), you may want to consider a different approach. I have seen vendors set up a self-service model from a plan sponsor website perspective. This means that plan sponsors could log onto your firms website, supply all necessary information to trigger a payout and electronically agree and sign the "form". This puts more of a burden on the plan sponsor, but it ensures that they retrieve the spousal consent, provide QJSA waivers and notices and confirm employee status "real-time". The good news for the client is that they have a reasonable assurance that the transaction is in the loop. As a vendor, you have essentially removed a lot of fixed cost in processing this type of transaction.

Talk with your internal counsel on the necessary client disclosures, contract addendums, communications, etc. Good luck.

[Guest FREE401k]

Jim: Thanks so much for all the information! Lots to think about. We'll probably do a test of paperless employment termination distributions after the first of the year, starting with participants with balances under $5000 who do not want a rollover, and see how that goes. Thanks again for the insights, and I'd love to hear anyone else's options/procedures/experiences.