The Secretary asserts fiduciary breaches for failing to "cash out" under-$5,000 accounts

[Peter Gulia]

In the attached complaint, the Secretary of Labor asserts that a retirement plan's trustees (who also served as the plan's administrator) breached their duties by failing to pay or deliver involuntary distributions for participants who had a one-year break-in-service and a plan account less than $5,000.

Beyond the harm of not paying benefits when due, the Secretary asserts the administrator's failure needlessly incurred per-participant service fees ($7 per quarter-year, and so $28 for a year) on individuals who ought not to have been participants.

 

Acosta v Stapleton complaint.pdf

[ESOP Guy]

If I read this correctly the DOL seems to be really keying into the fact the plan said these people "will" be paid.  So is the cynical defensive move to change the plan to "may" be paid? 

[My 2 cents]

"May", with its implied employer discretion, might not fly.  The plan could probably be changed to explicitly leave it up to the participants under $5,000 to decide whether to cash out (or roll the funds over) or not, but that brings with it a burden on the plan administrator to diligently bring this to the participant's attention, with information needed to make an informed decision, requiring essentially as great an effort as having the cashout be required by the plan.  The DOL does not consider it acceptable for the plan administrator to fail to discharge their duties with sufficient care and attention. 

[Peter Gulia]

Even if such a grant of discretion can be provided without tripping on some tax-Code rule, one wonders that discretion might not make a fiduciary's lot much better.

Under discretion, a fiduciary's decision not to provide a distribution might not be an obvious breach of an ERISA 404(a)(1)(D) duty to follow the plan's governing document.  But a fiduciary must use her discretion for the exclusive purpose of providing the plan's benefit.  And a fiduciary must incur only those expenses that are "necessary" expenses of the plan's administration.

What prudent standards would a fiduciary use to decide not to pay a benefit the fiduciary is permitted to pay?

 

[Peter Gulia]

The Secretary's complaint asks the court to order the breaching fiduciaries to restore the plan's losses that arise from the breach.

 

[My 2 cents]

31 minutes ago, Fiduciary Guidance Counsel said:

Even if such a grant of discretion can be provided without tripping on some tax-Code rule, one wonders that discretion might not make a fiduciary's lot much better.

Under discretion, a fiduciary's decision not to provide a distribution might not be an obvious breach of an ERISA 404(a)(1)(D) duty to follow the plan's governing document.  But a fiduciary must use her discretion for the exclusive purpose of providing the plan's benefit.  And a fiduciary must incur only those expenses that are "necessary" expenses of the plan's administration.

What prudent standards would a fiduciary use to decide not to pay a benefit the fiduciary is permitted to pay?

 

I think it goes beyond any sort of decision whether to make a payment.  The plan administrator has an absolute duty to make sure that individual participants are properly notified when they are eligible to receive benefits.  If someone terminates employment under circumstances that either call for payment or create eligibility to elect to receive a payment (especially something like a small balance situation, where the SPD would clearly be inadequate to put the participant on notice to the point where even some of the responsibility is transferred to the participant), it is incumbent on the plan administrator to make the payment or clearly communicate to the participant that they have the right to choose to be paid.  Promptly!

[Peter Gulia]

My 2 cents, I wrote the bit you quote before seeing your note; and I wrote only about a difficulty in meeting a fiduciary's duty if the fiduciary has a discretionary power to decide whether to pay or omit a distribution.

You rightly point out that a fiduciary's duty of communication might in some circumstances require a communication beyond those the statute commands.

 

 

[ESOP Guy]

1 hour ago, Fiduciary Guidance Counsel said:

Even if such a grant of discretion can be provided without tripping on some tax-Code rule, one wonders that discretion might not make a fiduciary's lot much better.

Under discretion, a fiduciary's decision not to provide a distribution might not be an obvious breach of an ERISA 404(a)(1)(D) duty to follow the plan's governing document.  But a fiduciary must use her discretion for the exclusive purpose of providing the plan's benefit.  And a fiduciary must incur only those expenses that are "necessary" expenses of the plan's administration.

What prudent standards would a fiduciary use to decide not to pay a benefit the fiduciary is permitted to pay?

 

Emphasis above is mine.

Here is a common fact set.

Plan says you may force out a <$5k balance.  The plan sends out notices and forms to all such people.  Let's for sake of argument agree the forms and notices represent proper notice to meet any fiduciary obligations.  The person doesn't return the form.  For sake of argument let's say the plan admin has no reason to believe this person is lost either.   I have plenty of plans (heck I have a little under $3k at a former employer's 4k plan over 5 years after I left) will take the attitude this person doesn't want to be paid.

While the this case make plan admins want to pay this person out it seems a bit arrogant of the DOL to insist that this person doesn't understand what they want and force them out of the plan.  If the DOL wins you might see more of that happening. 

In this case to me the fiduciary standard seems like "we asked and the person said 'no'".  If that doesn't protect the fiduciary I am not sure the rules aren't flawed. 

[jpod]

The arrogance is compounded, I think, by the fact that if it's over $1,000 and you don't hear from the participant you must do an automatic rollover, and quite often the annual charge is going to be more than $28 per year.

[MoJo]

Just as an aside - we currently have a client under DOL audit where failure to timely cash out small balances is also an issue - and the agent wants the company to restore the fees taken from those balances - EVEN THOUGHT THE MANDATORY CASH OUT IRA PROVIDER WOULD HAVE CHARGED BOTH INVESTMENT LEVEL FEES AND A PER IRA CHARGE FAR IN EXCESS OF THAT WHICH THE PLAN DOES.  In fact, almost half of the subject accounts would have been consumed by the IRA provider's fees by the time the audit is complete....

I file this under the penny wise, pound stupid category - and it applies to someone else's pennies.

[My 2 cents]

1 hour ago, jpod said:

The arrogance is compounded, I think, by the fact that if it's over $1,000 and you don't hear from the participant you must do an automatic rollover, and quite often the annual charge is going to be more than $28 per year.

Once the funds have been moved to a default IRA provider, the plan has NO responsibility with respect to the fees charged by the IRA provider (assuming that the IRA provider was chosen prudently - if the IRA provider charges $50 per year while others charge $28, that by itself could be a 401(k) plan fiduciary issue). 

Please bear in mind that the plan says that the funds WILL be paid out,not that they may be paid out.  If they were paid out, the DOL could never (barring improper selection of the IRA provider) come after the 401(k) sponsor because the IRA fees were chewing through the account balances faster than the 401(k) plan's fees would have. 

[Peter Gulia]

In this case [the complaint is attached in the originating post], the plan provides that an under-$5,000 distribution "shall be distributed[.]"

If the plan's fiduciaries dislike the plan's provision, they might try to persuade those who have power to amend the plan to make a different provision.  Until then, they should obey the plan's governing document unless doing so is inconsistent with ERISA.

Whether the Labor department should use its discretionary enforcement powers to pursue the particular breaches described in the complaint is a question I'll leave to other minds.

 

[ESOP Guy]

1 hour ago, jpod said:

The arrogance is compounded, I think, by the fact that if it's over $1,000 and you don't hear from the participant you must do an automatic rollover, and quite often the annual charge is going to be more than $28 per year.

Thought the same thing.  Add to this one of the reasons I have kept some money with former employers is they pay the TPA fees and I get access to the cheaper institutional funds.  But now the DOL is saying they are doing me a favor by making me go to an IRA I might pay an annual fee and be in the retails funds. 

[My 2 cents]

16 minutes ago, ESOP Guy said:

Thought the same thing.  Add to this one of the reasons I have kept some money with former employers is they pay the TPA fees and I get access to the cheaper institutional funds.  But now the DOL is saying they are doing me a favor by making me go to an IRA I might pay an annual fee and be in the retails funds. 

If the plans of your former employers say that they are not supposed to let you keep your money there, why are they doing so?  If the plan provisions do allow you to do that, even the DOL would not object to their allowing you to keep your money there.  I presume that you have a good way to keep track of all of the 401(k) plans that are holding pieces of your retirement funds (a listing tattooed on a shoulder blade?), but too often, people lose track of small retirement accounts and never receive the money.  Have yours all been reported to the Social Security Administration via Form 8955-SSA?

 

[ESOP Guy]

1 hour ago, My 2 cents said:

If the plans of your former employers say that they are not supposed to let you keep your money there, why are they doing so?  If the plan provisions do allow you to do that, even the DOL would not object to their allowing you to keep your money there.  I presume that you have a good way to keep track of all of the 401(k) plans that are holding pieces of your retirement funds (a listing tattooed on a shoulder blade?), but too often, people lose track of small retirement accounts and never receive the money.  Have yours all been reported to the Social Security Administration via Form 8955-SSA?

 

I don't know if it says must or may but so far they have let me stay.  Fortunately, I don't change jobs too often so the list of keeping tack of 4k plans is a very small. 

[ETA Consulting LLC]

I'm not sure if we read the same complaint.  If each participant actually paid their participant fee, then there would've been no complaint.  According to the complaint, the participant fees were calculated at $7 per quarter, but paid prorata based on plan assets.  This resulted in those individuals with balances larger balances having to play increased fees for those who terminated with balances of $5k or less.  According to the argument, those with 5K or less created the additional expense, but it was borne by the participants with larger balances.

As fiduciary, you have a responsibility to those individuals with the large balances (who don't have the option of taking a distribution) to avoid unnecessary expenses; which in this case, resulted from failing to distribute those who terminated with balances of $5K or less.

This is what it appears to have stated when I read it.

Good Luck!

[K2retire]

18 hours ago, MoJo said:

Just as an aside - we currently have a client under DOL audit where failure to timely cash out small balances is also an issue - and the agent wants the company to restore the fees taken from those balances - EVEN THOUGHT THE MANDATORY CASH OUT IRA PROVIDER WOULD HAVE CHARGED BOTH INVESTMENT LEVEL FEES AND A PER IRA CHARGE FAR IN EXCESS OF THAT WHICH THE PLAN DOES.  In fact, almost half of the subject accounts would have been consumed by the IRA provider's fees by the time the audit is complete....

I file this under the penny wise, pound stupid category - and it applies to someone else's pennies.

We had a  DOL auditor suggest that the plan sponsor's HR director should drive to the last known address of an unresponsive participant and knock on the door to see if the occupants knew where to find her. She declined, citing safety concerns.

The auditor apparently made some sort of contact that left the current occupants of the home with the impression that the participant (who was elsewhere recovering from surgery) owed them a share of her account balance. It got ugly.

[My 2 cents]

I have never heard of "diligent search" being interpreted, even by the DOL, as entailing a personal visit to the last known address.  Sounds like the kind of request that ought to be bumped up to the auditor's supervisor.

[K2retire]

The participant's daughter called the auditor and gave him an earful. That seemed to take care of the issue.

[MoJo]

1 minute ago, My 2 cents said:

I have never heard of "diligent search" being interpreted, even by the DOL, as entailing a personal visit to the last known address.  Sounds like the kind of request that ought to be bumped up to the auditor's supervisor.

Yea.  Well, we've had auditors "require" us as a service provider dealing with an abandoned plan to "certify" that we visited last known address.  We've done "drive by's" but under no circumstances would I ever allow anyone on my team to get out of their car.

We have actually had a DOL agent, though, make a personal visit to an elderly beneficiary of a deceased participant (abandoned plan) - who thought we were scamming her.  She threatened him with her cane (true story!) - and thought his "badge" was dime store bought.

[ESOP Guy]

Wow and I thought I had good stories from when I worked for the IRS!

[My 2 cents]

15 minutes ago, MoJo said:

Yea.  Well, we've had auditors "require" us as a service provider dealing with an abandoned plan to "certify" that we visited last known address.  We've done "drive by's" but under no circumstances would I ever allow anyone on my team to get out of their car.

We have actually had a DOL agent, though, make a personal visit to an elderly beneficiary of a deceased participant (abandoned plan) - who thought we were scamming her.  She threatened him with her cane (true story!) - and thought his "badge" was dime store bought.

DOL agents have badges?

[MoJo]

16 minutes ago, My 2 cents said:

DOL agents have badges?

They do!  I just hired one away from the DOL and since he had "10 years" in - he get's to keep it (albeit "framed" in a shadow box).

He said he didn't have a gun though....

[Peter Gulia]

A former employee’s right to request that her badge be retired so she can keep it is provided by an agreement between the labor union and the government.

 

At the outset of an EBSA investigation or inquiry, some practitioners consider it wise to see the examiner’s badge and personal-identity-verification card, and to write down the badge number.

 

Some examiners don’t wait to be asked, and instead assume a fiduciary or service provider (or its attorney) will want to inspect the badge.

 

[My 2 cents]

Hmmmm.  "EBSA Agent" might be a good idea for a TV show!

Agent, holding badge up: "DOL! Show me the employee records!"

[Tom Poje]

but if the agent's name is Columbo and he starts to leave, then turns around and says "Just one more thing about not making this distribution", it might be wise to sneak out the back way when you get a chance.

[ESOP Guy]

36 minutes ago, Fiduciary Guidance Counsel said:

A former employee’s right to request that her badge be retired so she can keep it is provided by an agreement between the labor union and the government.

 

At the outset of an EBSA investigation or inquiry, some practitioners consider it wise to see the examiner’s badge and personal-identity-verification card, and to write down the badge number.

 

Some examiners don’t wait to be asked, and instead assume a fiduciary or service provider (or its attorney) will want to inspect the badge.

 

Back when I worked for the IRS in the '80s we would have people ask for us for our official credentials (only CID had badges and guns).  We were told they were looking at either a date or which director's signature was on it- I don't fully recall.  That gave them an indication of how new or experienced the agent was and they incorporated that into their tactics. 

[My 2 cents]

12 minutes ago, ESOP Guy said:

Back when I worked for the IRS in the '80s we would have people ask for us for our official credentials (only CID had badges and guns).  We were told they were looking at either a date or which director's signature was on it- I don't fully recall.  That gave them an indication of how new or experienced the agent was and they incorporated that into their tactics. 

You could usually tell how experienced the agent was by the things they asked questions about!

[MoJo]

5 minutes ago, My 2 cents said:

You could usually tell how experienced the agent was by the things they asked questions about!

...or... the things they didn't ask!