Plan Termination Where Plan Sponsor / Administrator Bankrupt / Letter of Direction to Recordkeeper

[401 Chaos]

Client in process of Chapter 11 bankruptcy and near appointment of Liquidating Trustee.  In process on terminating the 401(k) Plan and the record keeper / trustee (very large mutual fund company) has prepared draft Letter of Direction with some unusual (at least to me) provisions.  Curious for any thoughts / experience from similar situations.

First, just to note the draft Letter served up is really "sloppy."  As the client said, it's like they asked ChatGPT to prepare rather than starting with some customization of a standard template document.  Among other things, draft letter provides as follows:

1.  Repeatedly says company "is" terminating plan and phrasing all the provisions throughout as if this will be of a future date when they know plan was already "terminated' and even reference prior date.  Not a big deal really as we can revise (assuming they will accept any edits) but the whole thing is very sloppy and confusing to read on some timing points.

2. Provides plan sponsor will not restore the forfeiture account funds to participants and if participants reach out "the Plan Sponsor will handle outside the Plan."  Huh?  Not sure what participants are going to be seeking forfeiture restorals in the future but how can the plan sponsor (which is bankrupt and about to be completely gone) handle outside the plan?  I guess not doing anything might be "handling outside the plan?"  Also, do record keepers typically suggest that potentially legit claims can be handled "outside the plan?"

3. Expressly indicates this is a Chapter 11 bankruptcy and that a Bankruptcy Trustee has been appointed and will act as a fiduciary of the plan going forward.   I don't know much about bankruptcy but understand Bankuptcy Trustees in Chapter 7 cases may have duty to step into the role of a plan administrator and take over some fiduciary duties.  Here, however, there is no Bankruptcy Trustee nor will there ever be.  There will be a Liquidating Trustee to liquidate and pay out to creditors but bankruptcy lawyer says they won't step into the role of plan admininstrator or take on other duties of for the company (debtor) / plan administrator.  Understand they may just be confused on roles here but who does step in normally in these cases? 

4.  There are also provisions noting that no FDIC or DOL Trustee will be appointed.  I'm unfamiliar with an FDIC Trustee or DOL Trustee.  Is that a real thing?   Is that possibly some reference to abandoned plan situations or something?  

5. Following appointment of the Liquidating Trustee, the company / debtor (and officers) will cease to exist as a matter of law so there technically is nobody around with any real authority to act for the company / plan administrator or take action for the plan.  I understand the DOL may consider the existing officers functioning as fiduciaries to continue in that role after the company is gone and employment has ended but is that what typically happens in these situations?  Is there any other way to approach?

6.  There are a few participants in a capital preservation fund that cannot be liquidated / removed by the plan without at least 12 months' notice.  If the participants in that fund affirmatively elect to move their funds out of the account and roll over their balances, is the 12-month notice period still applicable or is that only an issue if they must be forced out?  The letter suggest it may apply whether or not they request to roll over.  If so, they're into 2025 before all amounts get paid.

7. Letter notes the company will continue to be responsible for recordkeeping fees through end of quarter following the plan termination date.  Well, the company adopted resolutions "terminating" the plan in September so that suggests fees through December 31, 2023 but there is a lot left to be done by the record keeper (which has been moving like the bureaucratic behemoth it is) and so presumably lots more fees to come.  I should know this but don't--how do fees typically work in bankruptcy terminations?  There are some funds in the forfeiture and suspense accounts that, per the plan, can be used to pay plan expenses.  Will they hold making any allocations / distributions from those accounts until all work is done then follow any force out distributions with some later distribution?  If so, how long does that take--they have to do final 5500 which is a long time in the future.

Apologies for the long post / questions (and embedded rant) but welcome any feedback or suggestions with any or all of these if anybody has the appetite to address.  Thanks.

[Peter Gulia]

Whichever person is the plan’s administrator or, even if not so appointed, acts for those functions, directs the plan’s trustee, and instructs the administrator’s recordkeeper, third-party administrator, and other service providers.

Your description suggests such an administrator or other fiduciary might need some lawyering to rewrite the directions and instructions.

One practical suggestion to you 401 Chaos, don’t take on new or incremental work until you get a fresh (and carefully written) engagement and collect an advance payment of your fee. Beyond managing a risk of nonpayment, it’s a way to test whether a person has authority.

[401 Chaos]

Thanks, Peter.  All very good and helpful recommendations.  

In this situation, I believe the authority of the current plan administrator is clear and certain (at least for the foreseeable future until the next stage of the bankruptcy process) and we are very attuned to the potential risk of nonpayment (and corresponding need to try and sort and assist with these issues as quickly and efficiently as possible).  I also have on good authority that the plan's ERISA lawyer was, unfortunately, absent from law school the day they taught how to deal with this particular fact pattern and has not seen this situation before.  I am not sure they will be able to quickly engage a more experienced counsel under these facts.

Maybe I can shortcut an overarching question I have here which is to ask if others have seen leading recordkeepers serve up these sorts of sloppy draft Letters of Direction in bankruptcy situations?  Part of me wonders if it may be worth seeking (demanding) a more knowledgeable / experienced rep at the record keeper to help with this situation and the Letter, etc.  I feel like they haven't gotten the proper attention / assistance here.  Many thanks.  

[Peter Gulia]

Yes, I have often seen (and continue to see) sloppy draft directions and instructions. I rewrite them.

You’re right that the plan’s administrator should seek more and better attention.

If the recordkeeper’s draft is not what the plan’s administrator wants to direct and instruct, the administrator might refuse to sign.

If the plan’s administrator can get help from a lawyer who knows what’s needed, the administrator might present its rewrite.

In my experience, a recordkeeper’s customer-service people often are glad to receive a rewrite because they can present this to an inside lawyer or plan-compliance manager. Doing so takes an open item out of the customer-service person’s time-tracking while the matter is in another department. And sometimes a review helps get better attention.

If the plan’s administrator lacks help, it might wait on moving toward final distributions until the administrator can get help.