401(k) transferring assets

[Guest Lisa Allen]

A 401(k) plan is transferring assets from one fund company to another. The 401(k) includes both ee deferrals and er contributions. The owner and trustee of the company wants to put all prior employees with balances still in the plan in the money market fund at the new fund, regardless of their balance, rather than trying to contact those previous ees and asking them how they would like to be allocated at the new fund. Is that legal?

[MWeddell]

Sounds risky to me.

Shifting all of their money into the money market fund exposes the plan sponsor and other fiduciaries to liability. Most conversions these days are handled by transferring the money to similar asset classes in the new provider's set of investments (for those participants who don't select new funds at least) rather than putting everything in the money market fund.

Furthermore, to the extent the shift to the money market fund only applies to former employees, the IRS might view this as violating the cash-out consent regulation.

[Guest Gaylord]

Lisa,

The employer is in a "catch-22" whenever he makes any changes without attempting to communicate.

The broker (or fund family rep, if there is no broker) should offer to contact these people for IRA rollovers. This would both excuse the employer and reduce his bookkeeping costs.

Write if you need help.

[Guest Connie]

I think MWeddell is on target. If your plan is participant directed and tries of operate under 404© the administrator has a duty to make a good faith effort to notify all affected participants and give them a chance to make their direction, or your protection is gone.

An announcement letter to the last known address, along with an enrollment package, is enough. The letter can give a deadline for returning the investment direction, and can contain a notice that if the new directions are not returned by that date the participants money will be put into the most conservative investment option, most likely the money market.

Tracking these people increases the workload, and be prepared, some folks will want distribution to avoid a transfer to a new fund family.

Gaylord has a great solution, but check on the fiduciary advisability of giving participant information to an outside vendor, who could get financial gain from the transaction, without the participant initiating the contact.

[Guest Barry]

Lisa, in my experiences in plan conversions a simple answer is that it isn't ILLEGAL. I agree there can be issues that need to be addressed if this plan is (has) been (trying to comply) complying with 404©.

Furthermore, I have seen conversions operate under both circumstances (offering a fund to fund transfer, or by transferring it to a "conversion/default fund" during the transition period). The most contemporary way would be to offer a fund to fund transfer. That is, moving money from one similar fund (objective) to the same type of objective. In either case, I've seen the transition (quite) period be as short as two weeks to 60 days depending on the information transmitted from one record-keeper to the next.