Do your clients’ retirement plans allow a participant to get her benefit in periodic payments?

[Peter Gulia]

Some individual-account (defined-contribution) retirement plans allow a participant a choice of taking a retirement benefit in periodic payments.  Others provide a benefit is paid only as a single sum.  Some reason that limiting payout options doesn’t harm participants because whatever one might choose in an employment-based plan’s payout options can be accomplished with an Individual Retirement Account or Annuity [IRA].)

 

A recent Pensions & Investments article describes an Alight Solutions survey, which finds 57% allow periodic payments and 43% don’t.

 

I haven’t read Alight’s report, but I guess the sample is larger plans.  I wonder whether smaller plans have a different mix on allowing or precluding periodic payments.

 

So informal survey:

 

Do your clients’ plans allow periodic payments?

 

About whether to allow or preclude payments, do most clients follow your suggestion?

 

[Bird]

1 hour ago, Fiduciary Guidance Counsel said:

Do your clients’ plans allow periodic payments?

Not unless we have to (pension plan).

1 hour ago, Fiduciary Guidance Counsel said:

About whether to allow or preclude payments, do most clients follow your suggestion?

 

100%.  It's not a suggestion or a discussion.

You didn't ask, but the fact that this topic gets as much attention as it does on a policy level frustrates me.  The problems we have with the retirement plan "system" are mostly due to not enough money, not how it is paid out.  We're all busy right now and I'll leave it at that.

[Peter Gulia]

Bird, thank you for the clear and useful information.

Other BenefitsLink mavens, would you like to confirm or deny?

 

[Belgarath]

We always recommend lump sum only, but a few plans choose to allow periodic payments of some sort. In defense of the IRS, they did allow us to remove all the periodic payment options without an anti-cutback problem,  as long as lump sum is available.

99% of the clients follow our recommendation, but we do allow the option for something other than lump sum.

[RatherBeGolfing]

We always recommend lumpsum only, and have maybe one or two odd plans that wanted to allow periodic payments but it is never utilized.

The more you can do to eliminate the opportunity for mistakes the better.  

[Peter Gulia]

Belgarath and RatherBeGolfing, thank you for the further information.

The answers and reasoning confirm what I expected.

A further question for everyone:

If a big-enough owner nears age 70 and doesn't want a single-sum distribution, do you amend the plan?

 

[david rigby]

11 minutes ago, Fiduciary Guidance Counsel said:

If a big-enough owner nears age 70 and doesn't want a single-sum distribution, do you amend the plan?

Perhaps it is prudent to view this as a consulting opportunity: make sure you understand the context ("why do you want a periodic distribution?") before recommending yes or no to the amendment question.

[Lou S.]

I think Bird stated it perfectly.

[ESOP Guy]

Not only did almost all my non-ESOP plans only allowed a lump sum the few that allowed installments or annuity you could count on one hand how many people to something other than a lump sum.   I am talking about a period of time of over 20 years.  Yet, you would often times have to fill out some kind of disclosure that told them about the annuity options and so forth.  A lot of work for so little value. 

[Peter Gulia]

We all recognize the reasons for limiting a plan's benefit to a single-sum distribution.  And that's usually my advice to sponsors of ERISA-governed plans.

My follow-up query is about a business owner who might prefer to leave some amounts in her employment-based plan after her required beginning date.  Let's imagine she has a good reason for preferring it over an IRA.  Among other possible reasons, an ERISA-governed plan in some circumstances gets better protection from a participant's creditors.

In that situation, might an employer tolerate plan provisions that allow an owner's once-a-year payments?

 

[Lou S.]

If the business owner is still employed, what you are trying to do can be accomplished with a simple in-service distribution provision rather than adding the complexity of tracking small regular periodic payments that not everybody is set up to handle.

[Peter Gulia]

Lou S., thank you for breaking a logic jam for me.  (It's been a long time since I've thought about an in-service distribution beyond a hardship provision.)  I was thinking about an owner's required beginning date as a quasi-retirement event, but it's not.

For an owner who is employed or deemed employed, a 401(a)(9)-required distribution IS an in-service distribution (even if the plan's document doesn't so label it).

[ESOP Guy]

Yes if you are talking in-service distributions I have seen a fair number that allow people who are over age 65 take a fixed amount (say $100k).  It  is a little more common in ESOPs than say PSP but I have seen it in PSPs.  

[Peter Gulia]

I'm imagining a plan that provides the 70-something working owner once each year exactly the 401(a)(9)-required amount.  No less, because the plan is designed to meet IRC 401(a)(9).  But no more, because the participant had not elected a distribution.

[Belgarath]

Well, plans MUST provide for the RMD distribution, (for the more than 5% owner) regardless of other distribution provisions. That doesn't require anything special. An in-service distribution doesn't even need to be an "option."

If a plan sponsor insists on an annuity option, etc., while we would attempt to persuade the sponsor otherwise, we certainly would amend the plan. We wouldn't lose a plan over this! After all, we get paid by the hour - if the plan sponsor wants to engage in what we perceive as foolishness, it is ultimately not our problem, and their choice. We try to guide and counsel them, but sometimes they ignore our advice for their own reasons.

[RatherBeGolfing]

11 hours ago, Fiduciary Guidance Counsel said:

I'm imagining a plan that provides the 70-something working owner once each year exactly the 401(a)(9)-required amount.  No less, because the plan is designed to meet IRC 401(a)(9).  But no more, because the participant had not elected a distribution.

I agree with Belgarath, the RMD would not trigger a distribution of the remainder of the account even if the document has a "single lumpsum" option only.  I think that is a reasonable interpretation of most plan documents and does not need a special provision.  Maybe a better way to look at it is that a rollover eligible distribution triggers the "single lumpsum only" requirement? 

[Kevin C]

We advise against installments as a distribution option.  However, we do have some plans that allow terminated participants to take a partial distribution. 

[Earl]

Lump sum except for RMDs, and

in-service distributions

Want your money?  Roll it over and have at it.

[Patricia Neal Jensen]

 We suggest lump sum and clients almost always agree.  This may be "old school," but I discourage plans from holding assets that belong to terminated employees wherever possible.  They move and we lose track of them (the terminated employees) and why should a client remain a fiduciary on assets that belong to someone who does not even work for them any more?  As you correctly pointed out, almost all of the options a terminated employee would want are available with an IRA and then they have a direct relationship with the recordkeeper holding the money.  Finally, if the plan sponsor is near the audited plan number, it becomes imperative to avoid holding accounts that might push them over this expensive number.

[Larry Starr]

On 1/22/2019 at 9:25 PM, Fiduciary Guidance Counsel said:

I'm imagining a plan that provides the 70-something working owner once each year exactly the 401(a)(9)-required amount.  No less, because the plan is designed to meet IRC 401(a)(9).  But no more, because the participant had not elected a distribution.

Peter,

EVERY ONE of our plans allows for annuity distributions as the normal form because of the alternative which mandates that children of a prior marriage be disinherited. That is a big problem that most don't address.  We avoid that with a J&S requirement in all DC plans, but that also allows fixed period payouts.  So, how many plans allow periodic payments? ALL OF THEM.

But, how many periodic payments have we had over 35 plus years, exactly TWO and both of them were actual annuity purchases.  Two out of (probably) ten thousand by now.  Not much extra work.

The others finally got to the heart of your 70 year old; that's not an issue of a periodic payment since it's an RMD. And all of our plans also allow in-service distributions POST NRA, but only one a year, so the guy who is working but wants $10k out of his plan this year and is post NRA, no problem.  I myself am using this provision now (post NRA but prior to RMD).