Compliance

Plans Must Carefully Field ERISA Claims and Settlements

There are few, if any, regulations providing direct guidance on this matter.

By Lee Barney editors@strategic-i.com | August 07, 2015
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When a 401(k) retirement plan is awarded damages or receives a settlement from a lawsuit, it is incumbent on the retirement plan adviser to help the plan administrator figure out how to award the funds to participants.

Generally, the funds are first placed into a holding account, explains Daniel Johnson, head of the employee benefits and compensation practice at Moore & Van Allen in Charlotte, North Carolina.

Then, the first distribution of the settlement goes to pay attorney fees, says Mike Kasecamp, retirement plan consultant at CBIZ Retirement Plan Services in Columbia, Maryland. Their fees are typically 25% to 30% of the settlement, Kasecamp says. “It is unfortunate that with many of these settlements, the participants receive such small funds, while the attorneys can get millions,” he says. (See “Leveraging ERISA Attorneys.”)

Next, the administrator must figure out how to distribute the funds to participants, relying on the detailed files of their recordkeepers to determine how to allocate the funds on a pro rata basis, Johnson says. Sponsors typically divide the settlement by each participant’s balance at the time of receipt to figure out a percentage to pay them, Kasecamp says.

If the settlement was determined in a relatively short period of time, it could be easy for the administrator to allocate the funds, Johnson says. However, in most cases, lawsuits carry on for several years or longer. In that time some participants many have left a plan, making it challenging for the administrator to locate them and potentially causing delayed payments, Johnson says.

“Plans don’t stay static,” Johnson says. “People move their money around, and some people may have paid out or have left the company.”

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