401(k) Closure - Navigating the Complexities of Plan Termination

The current economic climate has created problems for everyone.  Investment advisors are no exception.  Unemployment statistics are up and portfolio assets are down.  We’re all being challenged to do more with less and no one looks forward to the sudden impact and prolonged ripple effect of the termination of a defined contribution plan.

Although there are many reasons why 401(k) plans are terminated – from mergers and acquisitions to changes in employee benefits packages – there is only one process for doing so in compliance with ERISA and Department of Labor regulations.  If you’ve been through it yourself, you know that helping clients through the task of closing a 401(k) plan is a lengthy, complicated and daunting process.

There are a variety of challenges to face including confirming that the plan is in compliance, communicating with plan participants, and finally, making sure that every cent is accurately distributed.  This is much easier said than done when there is no response to mailings and notifications.  RIAs are spread so thin managing and maintaining current clients, they seldom have the bandwidth to assist with plan closure by the prescribed regulations.  On top of that, it is difficult to justify engaging in this effort when it means the loss of a client.

Third-party expertise can help navigate the complexities of a successful plan closure, by efficiently handling the stages of the termination process.  These include:

1. Reviewing plan to ensure plan is in compliance with all appropriate rules and regulations, date of termination is established, and benefits and liabilities are determined.

2. Filing IRS Form 5310 (Application for Determination for Terminating Plan) and/or Board Resolution

3. Contacting plan participants with appropriate documents and notifications

4. Distributing assets per participant requests

5. Following Department of Labor required steps for the “missing” participants

6. Distributing remaining assets of non-responsive participants via rollover, escheat, insured bank account

Ultimately, a 401(k) plan cannot be closed until all of the plan assets have been distributed. 

The key to successfully helping your clients ease through any process relating to their retirement plan is to keep track of regulatory changes and make any and all necessary modifications to the plan document.  As you know this ensures that each new regulation is addressed correctly, completely and on time.  By taking these steps you will also ensure that a client who chooses to terminate their plan will more easily proceed through stage 1 above.   Filing the IRS Form 5310 also becomes easier in this circumstance.

In our next issue we will address contacting plan participants and asset distributions.  

To learn more about increasing efficiency, containing costs and mitigating risks associated with retirement plan termination process, please contact Jason Sauer, VP Sales – Keane Retirement Services, by calling 800-848-8896x3224 or email: jsauer@keaneco.com

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