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Speed Up 401k Plan Closures

By Doug Johnson. Mr. Johnson is President of The Keane Organization, a leading provider of compliance and risk management solutions for Fortune 1000 corporations, financial institutions, and mutual funds, can be reached at 610.232.0700. For more information, also visit Keane's website at www.Keaneco.com.

    
Every year, businesses terminate over 20,000 small 401k plans. Some of these plans may be worth mere pennies, but they put a much higher, heavier toll on plan sponsors.

Often, the smaller the plan, the larger the struggle to locate account holders to cut distribution checks and formally close the plan.

Fortunately, it's possible to expedite the closure of defunct 401ks by knowing the correct steps in the process, and coordinating with recordkeepers and plan sponsors. What's more, sponsors can enlist the help of third-party experts to simplify the entire process and evade common pitfalls.

Step 1: Terminate Qualified Plans

Since their creation in the early 1980s, 401k plans have enrolled significantly more participants as companies move away from traditional pension plans and toward defined contribution plans.

As a result, more participants means more plan and participant management issues. These issues are magnified when plans are disrupted because a company undergoes a merger, is purchased by another firm, or goes out of business entirely.

Plan sponsors can determine termination eligibility of idle plans in two ways. They can get an IRS opinion on its eligibility, or their company's board of directors can mandate the termination with or without IRS approval.

Any available documents-including signed plans, board resolutions, and joint survivor benefits-should then be reviewed to ensure all dates and terms are clear and accurate and that all testing and filing has been conducted over the years.

At this point, sponsors should consider working with a third-party solution provider, who can step in and manage the review process. They can conduct assessment questionnaires at the outset to create a snapshot of what problems and situations exist for the plan sponsor.

No one wants the IRS issuing fines or penalties, so remediation may be necessary to keep the plan in compliance before it is officially terminated. These remedies may include re-filing 5500 reports from past years or conducting ADP testing for the first time.

Assessment and remediation also helps the third-party provider complete the document review process with greater efficiency and identify what key components (such as board resolutions) are missing. This establishes an accurate, compliant foundation for the rest of the closure process.

Step 2: Contact Residual Plan Participants

Often, problems can be avoided if sponsors know what they are heading into. Some plan sponsors are facing the closure process for the first time, and simply don't know what they're doing.

This is especially evident when it comes to contacting outstanding plan participants. Inevitably, many participants have left the employer, relocated, and forgetten to update their records. Plan administrators need help with the logistical details, such as finding missing participants, updating records, sending information, getting new addresses, and filing unclaimed property reports to the states when necessary

Furthermore, the administrators are often going to another job, yet remain responsible for unwinding the previous employer's plans. As a result, these fiduciaries often end up devoting years of part-time, after-hours work, as they struggle to complete the lengthy project. Common hassles include undeliverable mail, non-responses, and numerous follow-up mailings and phone calls.

Outside solution providers have the resources to track down correct addresses or non-responding plan participants. They also can handle all participant communication, answer any questions, and walk the participants through the distribution elective process in significantly less time than a lone plan administrator could do.

Step 3: Distribute the Assets

Not everyone involved is under the same pressure to terminate the plans. Some recordkeepers leave their billing system turned on, regardless of long periods of inactivity or a large percent of missing participants. They can charge an annual fee as long as they hold onto the assets.

Plan sponsors have to consider what is in the best interest of the participants and the plan. Everyone loses when the assets dwindle away, which is one reason ERISA was created - to protect assets for their rightful owners.

Distributing the assets requires cooperation to ensure all funds reach their intended destination. Plan sponsors should work with the recordkeepers and the asset trustees to distribute the money after receive all distribution directions and electives.

Step 4: Be Prepared for Anything

Problems arise when plan administrators become unavailable or simply give up on the process, essentially abandoning the plan.

When participants contact the recordkeeper to demand their money, the recordkeeper has no permission to distribute the assets. Plan participants are forced to access legal resources-from ERISA lawyers to the Department of Labor-to get their money.

When the recordkeepers are restrained and the plan administrators are gone, everyone involved faces record-keeping issues, distribution tie-ups, and legal problems. On top of this, the participants still don't have their money.

Fortunately, the Department of Labor has issued guidelines that provide a mechanism for plan sponsors to address this logistical nightmare. However, the challenge to communicate with participants remains. Companies have to make sure all checks are cashed, including any for residual interest, because every cent must be distributed before the plan is closed.

The ultimate reward for sponsors and recordkeepers will be filing their final 5500 form and declaring the plan officially closed.

Expedite With Experts

Though plan sponsors and recordkeepers are capable of undertaking this entire process on their own, companies like The Keane Organization have developed an expertise in the services that are required to streamline the 401k closure process.

Indeed, leveraging others' expertise and experience smooths out the termination process at every stage. This includes using technology to conduct risk assessment questionnaires, providing targeted ERISA legal consulting at reasonable prices, communicating with plan participants, and distributing and escheating the assets.

The benefit of outsourcing is that plan sponsors and recordkeepers can rest assured knowing that their company has remained fully compliant, returned assets to plan participants, and resolved an expensive and time-consuming issue quickly and affordably.

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