Recordkeeper Mandating Increased Cash-Out Limit

There was a message in my email inbox this morning (sent after hours on Friday) from an institutional recordkeeper notifying TPAs that the recordkeeper will apply the $7000 increased cash-out limit starting July 2024.

The message in the email to TPAs essentially was the recordkeeper was going to apply this to all cash outs, but no rush, you have until 2026 to amend the plans.

The message in the communication to the TPA's clients was the recordkeeper was going to apply this to all cash outs, and you (the client) will need to update any participant communications and amend your plan document.  If you use the recordkeeper's pre-approved document, no worries, an amendment will be provided asap.  If you do not use the recordkeeper's pre-approved document, then you should notify your document provider so the change can be made and appropriate notice is provided to your plan participants.

It seems this recordkeeper is trying to put TPAs and document providers between a rock and a hard place.

• There is no discussion of amending now versus amending later. 
• There is no suggestion of plan sponsor discretion. 
• There is no opt-out offered. 
• There is a sense of urgency communicated to plan sponsors that is not communicated to TPAs.

What is your opinion of a recordkeeper making a unilateral decision applicable to all of the plans they service?

Recordkeeper $7000 mandatory distribution notice.pdf Recordkeeper to TPA $7000 mandatory distribution notice.pdf

If one translates the communication to what might (depending on the service agreement) be arguably legitimate:

The service provider offers its service to support your plan’s provision for a small-balance involuntary distribution only if your plan’s provision sets its condition at the maximum amount ERISA and the Internal Revenue Code permit.

Many service agreements include provisions designed to support service changes.

If so, the service recipient’s choices might be:

1)         Fall in with the recordkeeper’s business preference.

2)        Change the plan to omit a provision for a small-balance involuntary distribution.

3)        Don’t change the plan, but accept that the recordkeeper will perform its services applying the maximum amount.

4)        Find another recordkeeper.

5)        Administer the plan without a recordkeeper.

Many service recipients will find choices 3-5 impractical.

If I were to advise a plan sponsor (one that also serves as its plan’s administrator and trustee) that received this communication, my advice might be grounded, in some (not all) meaningful parts, on (1) whether the service provider has a contract right to treat the service change as accepted if not expressly rejected; (2) the service recipient’s overall working relationship with the service provider; (3) whether the service recipient has bargaining power; and (4) whether it is feasible for the service recipient to find a recordkeeper that would behave better.

4 hours ago, Paul I said:

What is your opinion of a recordkeeper making a unilateral decision applicable to all of the plans they service?

Recordkeeper $7000 mandatory distribution notice.pdf 100.17 kB · 5 downloads Recordkeeper to TPA $7000 mandatory distribution notice.pdf 278.34 kB · 3 downloads

To each his own.  Mandating a provision for the convenience of the recordkeeper seems to me to be a bad business decision, and one that should weigh in on the fiduciaries' decision on who to engage for those purposes.  That said, having "defaults" clearly is needed to manage the volume of changes.

We took the position that if the plan had a $5,000 cash out limit, we would "default" them to $7,000, with ample opportunity to opt out of the default and select a different (lower) limit.  We "defaulted" all others to staying at the limit they had in their plan (and most were $1,000 to avoid the IRA requirement).  We did have some opt for something different than the defaults (both of them), but not many.

MoJo, your recordkeeper’s way is much better than many others.

55 minutes ago, Peter Gulia said:

MoJo, your recordkeeper’s way is much better than many others.

Well, IMHO, that's because they saw fit to hire me!  (Just kidding - maybe!)

We had a entire task force working to interpret, evaluate, and implement, and have developed tracking on client "elections."  Quite the undertaking....

MoJo, lawyers in AmLaw 200 law firms and employee-benefits boutiques “keep book” on which recordkeepers have inside counsel who think about the service recipients’ interests.

We hope you’ll stick with it.