401(k) Default Funds

[Guest stevena1]

A topic has caused some discussion in our TPA office and I would like any opinions or ideas.

We are a small regional independent TPA. We run daily plans on relius.

A book of our plans have default funds. If a payroll comes in and the participant is not enrolled, we routinely used the default funds.

Everything was fine until the day 1 participant came back to us and said that he had been invested in the default fund for a year, and it was not what he filled out on his enrollment form. We said we never received an enrollment form, he went to his HR Department and they faxed us a copy of it, saying it was mailed to us the prior year.

Weeks of discussion ensued...who did or didnt get or send it. What really happened? I have no idea. Maybe they did mail it. Maybe not. Maybe someone at our office lost it. Maybe it got lost in the mail. Who knows.

Point is, we wound up paying out a big chunk of money over it.

We instituted a new policy: any plan could have any default fund they wanted, the plan could have a default, no problem...but the use of that default required the instruction by the advisor or the plan sponsor.

It worked to cover us in case a default was not really a default but a lost enrollment form. But now we are growing and the number of plans we are processing is increasing. We are wondering how to manage it.

We have thought about it for days. Maybe send a monthly report to plan sponsors that says who we defaulted? But then we thought, that will require time to run, time to post to the web...about the same 5 minutes we spend contacting the plan sponsor to have them email us that it is ok to default the participant.

Anyone have thoughts on this? We know it seems a bit overkill in the CYA category. But we really dont want to write a check again. And if we cant get plans to enroll online, we are stuck with paper for a certain set of plans and there's nothing we can do about it.

Appreciate anyone else's thoughts or suggestions!

[J Simmons]

I've seen investment policies for plans that permit participants to direct the investments specify that a directive not implemented is presumed not to have been provided to the TPA unless the party claiming to have sent it has proof that it was received by the TPA, such as a fax confirmation page, an e-mail read receipt, certified mail receipt (signed), etc. This is to avoid the proof problem in a 'he said, she said' situation.

[rcline46]

Our quarterly certs say 'If not challenged in 30 days after receipt, tough nuggies' or something like that. If your certs don't, they should. Then the participant only has a claim up to 30 days (max claim period would be say Jan 1 to Mar 31, cert Mar 15, claim ends April 15th).

Does not solve the problem, but limits exposure.

[ACox]

Nothing stops the problem for sure, but try running the default investment report when you post your contributions. Once you have this report, fax it to the plan sponsor with every payroll that is processed. This way they will have received the default investment list and can provide any missing enrollment forms. If someone does slip through and goes into the default investment by mistake then it should be caught within a payroll or two instead of waiting a whole year.

Also you may want to make sure you explain to the client exactly what report they are receiving. I ran into an issue with a plan sponsor where they had been receiving the report and did not know what it was so it was thrown away each time. Once it was explained to them they were much more attentive to getting the enrollment forms back to us.

[PLAN MAN]

Our quarterly certs say 'If not challenged in 30 days after receipt, tough nuggies' or something like that. If your certs don't, they should. Then the participant only has a claim up to 30 days (max claim period would be say Jan 1 to Mar 31, cert Mar 15, claim ends April 15th).

Does not solve the problem, but limits exposure.

Good luck trying to enforce the "30 days" if a participant challenges an error. The plan administrator is responsible for the accuracy of plan transactions and by extension, the TPA depending on what is outlined in the service agreement.

[Guest stevena1]

Thanks so much. We actually do have the 30 days language on there, but it didnt matter much. We actually came up with the solution that A Cox suggested- every time a payroll has a default, we are going to print that and email it and then save the email on our server. And we are going to send out a letter to our clients that explains the new process and why they should pay attention to the email.

Thank you....

[BG5150]

Just out of curiosity, what did the person want to be invested in that did so much better than the default fund given the market conditions over the past year. (Hopefully it wasn't one of Madoff's funds!)

Usually, the default fund is something safe, that preserves principal as best that it can. If the default fund lost a lot of money, you may want to revisit what the default fund is.

[J Simmons]

Good observations, BG5150!

[Guest naveen]

Put Options !!! Maybe

[Guest Pam B]

We have the disclaimer on the bottom of the quarterly reports to limit liability. However, we also post the required QDIA notice online as well as providing it to the participants once a year. In addition, the particpants are informed in their enrollment kits that if we do not receive investment instructions from them that their money will be deposited into the plan's default fund which is the XYZ fund. We have had a few challenges on fund allocations but to date, none of them has gone anywhere.

[Guest stevena1]

This all happened before the market slide. Its still a point of discussion simply becasue we cant come to a good, efficient way to cover ourselves.

The issue is only that participants actually HAVE filled out enrollment forms. I asked our processors who hold up the payrolls (right now thats our policy) and they said 90% of the time, the HR person says "oh, that form is on my desk...I forgot to send it to you!" Only 10% of the time is it a real default where the participant has not actually made an investment election. Thats a lot of potentially incorrect defaults.