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Terminated Employees Can Be
Toxic to the Health of Your Plan
THE SUPREME COURT’S recent decision allowing 401(k) participants to sue plan
administrators for breach of fiduciary responsibility may be putting your
customers in jeopardy. The ruling specifically addressed the question of whether
the Employee Retirement Income Security Act (ERISA) permitted lawsuits by
individuals over loses to their own retirement accounts.
The case in point concerned a Texas man, James LaRue,
who sued his plan administrators after his account lost
$150,000. LaRue, a former employee of the plan sponsor,
claimed the administrators did not follow his
instructions to move his money to safer investments.
Judge John Paul Stevens ruled on the matter by saying:
“Fiduciary misconduct need not threaten the solvency of
the entire plan to reduce benefits below the amount that
participants would otherwise receive.”
Gone but Not Forgotten
The ruling demonstrates once more why plan advisors
should act quickly to move terminated employees off of
their plans. Ted Benna, known as the “father of the
401(k),” and a frequent advisor to Congress and
regulatory authorities, has long warned about the
fiduciary requirement to provide sufficient information
to make informed investment decisions.
“This applies to all participants, including those who
are no longer employed by the company,” he says.
“Inactive participants are entitled to documents such as
new Summary Plan Descriptions (SPD), material
modifications to the SPD, the Summary Annual Report,
notice of all IRS filings, participant statements, and
if requested, the Plan document and the entire Form
5500.” Every investment and provider change, including
fund replacements, additions, or deletions, must also be
communicated.
“Successfully managing the liability exposure during a
provider change is extremely important,” notes Benna.
“Providing complete communication regarding such
changes, including the black-out notices that are
distributed to active employees, is essential.” Benna
even suggests that former employees be given the
opportunity to attend educational meetings that are held
for active employees.
The necessity of communicating with ex-employees results
in increases workload, plan costs, and your liability.
Benna says some former employees who harbor grudges
against their ex-employers have used the non-receipt of
plan information as a reason to file suit.
Pension Protection Act Changes Bring Additional
Risks
I’ve heard from many plan advisors – including attendees
at the 2008 DCP Institute in West Palm Beach – that
although they understand the risks associated with
keeping ex-employees on their plans, they don’t
necessarily know how to manage them. That’s unfortunate,
because the problem is about to grow exponentially.
Many
experts in the field expect the 2006 Pension Protection
Act to have enormous repercussions. For instance, one
provision of the act offers incentives to companies that
adopt auto enrollment. That will certainly increase plan
participation, and with turnover in the U.S. averaging
between 10 and 20 percent annually, it will also
increase the number of terminated employees to undermine
the effectiveness of 401(k) plans.
Further, as
the economy continues to worsen and a recession looms,
there will be more 401(k) loans, hardship withdrawals,
and cash-outs. Robert Pascuzzi, head of Creative
Planning 401(k) in Kansas City, MO, sees this as
worrisome, given the latest ruling. “You have to wonder
if these employees who take money out of their accounts
will eventually sue plan managers for not providing
adequate guidance. This new ruling opens the door for
that.”
Being Proactive Can Help
There are ways to mitigate these potential risks – and
perhaps avoid them altogether. The 2006 Pension
Protection Act, recognizing that transitioning employees
often have no where to turn for assistance, granted plan
participants greater access to professional retirement
investment advice. Plan advisors should seize this
opportunity to provide education and objective,
qualified help as well as access to a variety of quality
IRA products that are appropriate retirement savings
vehicles. In addition, it’s prudent to rollover the
assets of retiring or terminating participants and
roll-out the accounts of former employees into safe
harbor IRAs. These steps will keep plan participants
invested in retirement and help advisors and their
sponsors lower plan costs, reduce administrative
headaches, and lessen liability exposure.
To learn
more about these rollover options and RolloverSystems,
an independent provider of rollover services, please
call 866-827-9608 or visit us online at
www.rolloversystems.com.
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