PSCA
Join our Community

Irresponsible, Unaccountable, Unreliable

10/25/2019
By Jack Towarnicky

Who are we talking about - plan sponsors or participants? Is there added exposure for plan sponsors who do (more than) the minimum?

Nearly a decade ago, my predecessor David Wray wrote a blog post titled: “401(k) Adequacy and Employer Liability.”1 He stated:
“… At a recent conference I was asked If DC plan sponsors should be concerned about being sued if their 401(k) participating employees enter retirement with inadequate resources. It's time to put this question to rest. No, they should not be concerned. First, American workers will typically work for several employers before they retire … Second, what is adequate? (Where workers had access) … Do they … have a legitimate case against an employer because their 401(k) savings are not adequate? Of course not. … DC plans (require) … no guarantees and it is misleading to suggest that there are or ever will be. …”

I once fielded a similar question from a Japanese insurance company executive.2 In a prior plan sponsor role, I looked at my participant population and confirmed that fewer than 8 percent of individuals hired decades ago had remained with the firm long enough to complete 25 years or more of service and reach age 55. And, this was for a firm that offered lucrative retirement benefits - a defined benefit pension plan, a 401(k) plan with an employer match, and retiree medical coverage with employer-paid financial support.

I agree with David. Litigation is less likely when workers are aware of the opportunity.

Recently, Chris Carosa raised a different, but related issue: What exposure do plan sponsors and other fiduciaries have when they do more than the minimum, specifically regarding those who have separated from employment but continue participation?3 That would include former employees who might be terminated and vested or retired. Chris states:

“… With 401k plans mostly on some form of autopilot, employees may be less conscious of their own assets than they were, say, a dozen years ago. For years now, the industry has been making much of “set-it-and-forget-it.” But does this philosophy have a downside? It may when employees leave for another company. They often, sometimes unknowingly, leave their 401k behind. … In many ways, permitting former employees to remain in the company’s 401k plan places the plan sponsor between a rock and hard place. … if they choose to allow former employees to keep their assets in the plan.”

He follows that up with an article in Forbes4, and a separate post:

“… Why, then, must a former company be left on the hook forever when it comes to an ex-employee (who leaves) his retirement savings there? There’s a cost to this. First, the company has a fiduciary duty to continue to safeguard the retirement assets of long-gone employees. … Anything that takes away this focus (on company mission) can harm business growth, which hurts everyone working for the company. In the worst case, the plan itself bears the cost of servicing ex-employees. That means current employees pay in part for the benefits enjoyed by people who are no longer adding value to the company.”

Many plan sponsors disagree. More and more have adopted policies, practices, and provisions designed to retain assets in the plan.5 Here are a few of the reasons why both plan sponsors and participants may be better served when assets are retained after separation:

  • Not solely under the employer’s control - participants generally get to decide whether to continue an account once the balance exceeds $5,0006
  • Participants retain the same control over their assets, in terms of investments and distributions; 
  • DOL and IRS rules allow a plan sponsor to recover any added costs where a former worker continues an account; and, in many plans, participants already pay most if not all variable costs;
  • Retaining accounts and assets may lower the per-capita cost of administration for all participants as the plan increases in size (number of accounts, assets under management); 
  • Participants are often familiar with the plan’s investment choices and those investments may not be available in the IRA marketplace;
  • Participants may be familiar with the plan, so, a rollover into the plan after separation may be the better option for consolidating/aggregating retirement assets;
  • The rollover process may be cumbersome7; and 
  • Plans that offer 21st Century electronic banking functionality give term-vested and retired participants an added option or liquidity via a plan loan that is not available in an IRA. 

There are a lot of disruptions to retirement preparation. Leakage and IRA rollover processing need not be one of them.


1D. Wray, 401(k) Adequacy and Employer Liability, 11/10/10, Accessed 10/25/19 at: https://www.psca.org/401-k-adequacy-and-employer-liability
2J. Towarnicky, Leaving Match on The Table: Part 1 of 2 - Connecting the Dots. 2/6/18, Accessed 10/25/19 at: https://www.psca.org/blog_jack_2018_3 See also: Leaving Match on the Table? Part 2 of 2: Innovations to Make Up for Missed Opportunities, 2/13/18, Accessed 10/25/19 at: https://www.psca.org/blog_jack_2018_6
3C. Carosa, 401k Plan Sponsors’ Fiduciary Obligation to Former Employees, 10/22/19, Accessed 10/25/19 at: http://fiduciarynews.com/2019/10/401k-plan-sponsors-fiduciary-obligation-to-former-employees/ 
4C. Carosa, The Problem With (And Solution To) Leaving Your 401(k) With Your Former Employer, 10/24/19, Accessed 10/25/19 at: https://www.forbes.com/sites/chriscarosa/2019/10/24/the-problem-with-and-solution-to-leaving-your-401k-with-your-former-employer/#69960ae758c8
5PSCA, 61st Annual Survey, 2018. “One in five employers actively encourage participants to keep assets in the plan upon retirement.” 51% of retirees keep assets in the plan.” See also: Callan, 2019 Defined Contribution Trends Survey. 58% of surveyed plans have a policy focused on retaining assets. 65% seek to retain retirees’ assets, while 51% seek to retain terminated vested participants’ assets. Only 25% of plans do not seek to retain assets. Accessed 10/25/19 at: https://www.callan.com/wp-content/uploads/2019/04/Callan-DC-Trends-Survey-2019.pdf
6IRS, Accessed 10/25/19 at: https://www.irs.gov/retirement-plans/plan-participant-employee/401k-resource-guide-plan-participants-general-distribution-rules
7N. Adams, Are Plan Sponsors Looking at Leakage? 10/11/19, Accessed 10/25/19 at: https://www.napa-net.org/news-info/daily-news/reader-poll-are-plan-sponsors-looking-leakage; See also: D. Mercado, Botching this decision could cost you your retirement savings, CNBC, 10/2/19, Accessed 10/25/19 at: https://www.cnbc.com/2019/10/02/botching-this-decision-could-cost-you-your-retirement-savings.html

comments powered by Disqus