Compliance June 21, 2021

A Well-Informed Look at the EBSA’s Terminated Vested Participant Project

Justine Kim worked as a DOL investigator from 2006 to 2018. In this guest article, she offers tips for advisers about the ongoing Terminated Vested Participant Project, which has resulted in many millions of dollars in fines and penalties for plan sponsors.
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The Department of Labor (DOL)’s Employee Benefits Security Administration (EBSA) started a project called the Terminated Vested Participant Project (TVPP) back in 2017. I was the project leader of the TVPP, which was a national project, initially overseeing more than 25 investigators at the Los Angeles Regional Office (LARO).

The TVPP ensures that defined benefit (DB) plans maintain adequate records and procedures for contacting terminated participants with vested account balances. These benefits may be at risk of forfeiture upon death—or significant tax penalties—if participants are not made aware of their rights and responsibilities with respect to benefit distributions. Terminated participants or their beneficiaries in plans that are missing or lack complete census data may be unable to access their benefits.

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Recognizing this challenge, the TVPP aims to ensure that DB plans maintain up-to-date census records and effectively communicate to terminated vested participants their eligibility to apply for benefit distributions as they near normal retirement age.

TVPP cases involved collecting census data for the last three years to determine whether, first of all, the plan administrator indeed notified participants (including retired and terminated participants) who reached their normal retirement age regarding their right to collect a distribution. More importantly, we analyzed whether plans notified participants who were age 70.5 and older that they need to take a required minimum distribution (RMD), and whether the plan administrator made mandatory distributions according to Internal Revenue Service (IRS) regulations. In addition, the plan administrator needs to make reasonable efforts in locating and notifying any missing participants. 

Our investigation revealed that many plan sponsors were not notifying a substantial number of their participants regarding distribution rights and their RMD rights. As such, the investigation project ended up recovering billions of dollars in monetary relief. In one case, the investigations resulted in recovery of over $35 million dollars from a single multiemployer plan. The monetary recoveries were put back into plans in order to make distributions to participants who had been harmed.

In fiscal year 2020, EBSA closed 1,122 civil investigations, with 754 of those cases (67%) resulting in monetary results for plans or other corrective action. Recoveries on behalf of terminated vested participants played a large role in these results. In total, EBSA’s enforcement program helped more than 29,600 terminated vested participants in DB plans collect benefits of over $1.48 billion owed to them.

Keep in mind, violation of the RMD rules is also a violation of the IRS law. Therefore, errors by uninformed participants may trigger huge tax consequences. Plan sponsors should be aware that, even after a TVPP investigation closed, EBSA may refer the matter to the IRS in cases where significant violations are found. 

In my experience, almost all of the plans I investigated, which included huge multiemployer plans with billion dollars in plan assets, had third-party administrators (TPA), but I still found many TVPP violations. As a matter of fact, during the investigations in my years at the DOL, from 2006 to 2018, I found violations in more than 90% of my cases, even though the companies/plans had TPAs working for them. 

All in all, it is extremely important that plan sponsors understand that, although TPAs may be experts in administering the plans, they are not always experts in making sure plans are in full compliance with the Employee Retirement Income Security Act (ERISA). ERISA is such a specialized field of law that even some attorneys specializing in ERISA do not know all the intricacies of dealing with an EBSA investigation, including the ins and outs of an investigation, unless they have experience with a previous EBSA investigation. 

Another important takeaway, in my experience, is that plan sponsors should identify any potential ERISA violations and make corrections before plans are investigated. This may help them avoid facing steep fines, penalties and lost interest that can result from non-compliance with ERISA. 

Keep in mind, EBSA is still conducting investigations and looking at TVPP issues. Plan sponsors should contact their TPAs to make sure they are not violating laws related to TVPP. If they do not have a TPA, they may contact an ERISA compliance specialist to ensure compliance. 

About the author:

Justine Kim is president and founder of JSK ERISA Consulting Services. She holds a bachelor of arts degree in political science from San Francisco State University and a juris doctor degree from Southwestern University School of Law.

Kim started her career as an investigator with Employee Benefits Security Administration (EBSA) in 2006 and was promoted to a senior investigator in 2011. During her time with the EBSA, she conducted hundreds of investigations relating to all types of ERISA-covered employee benefit plans. In addition, Kim led multiple regional and national projects, including one that trained new investigators in 401(k) employee contribution issues.

She can be reached by email at Justine@JSKerisa.com or by phone at (213)348-1006.

Editor’s note:

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.

Client Service June 16, 2021

Adviser Op-Ed: The Merits of a Retirement and Benefits Task Force

A case for why retirement plan advisers and employee benefits professionals should join forces to meet workers’ financial health needs and solve complex health-wealth issues.
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Even as the coronavirus pandemic swept through the United States, it aggravated another sort of epidemic that has grown to troubling proportions: the failing financial health of many Americans.

Addressing the “other epidemic” should be a priority as employers reset their organizations for a post-pandemic environment. The best cures will come when their retirement plan advisers and employee benefits specialists team up for the effort.

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Financial stress has been an ongoing issue for Americans, but the problem clearly expanded during the pandemic. A report published last year by John Hancock, its “2020 Financial Stress Survey,” found that 62% of surveyed workers were experiencing moderate or extreme financial stress, compared with 39% before the pandemic. One in four workers was forced to dig into savings to get by.

The causes of financial stress are well-documented. One of the most important sources is the overwhelming burden of student loan debt, now at $1.7 trillion and a drag on some 44 million Americans, according to the U.S. Federal Reserve. Credit card debt and other forms of debt also cause substantial concern.

Financial stress costs employers as much as it costs their people. The John Hancock survey estimates a given employee can lose some 47 hours of productivity per year due to absenteeism and the at-work distractions caused by serious financial worries. Further, it hinders some employees’ ability to save, particularly for retirement.

Overall, retirement readiness remains a persistent problem for plan sponsors, given the greater costs associated with supporting older employers who can’t afford to retire. It’s not just the pay differential between older employees and new entrants to the job market, but the greater health care liability and workers’ compensation costs. There also are more intangible costs in terms of lost opportunities when fewer job openings exist to bring in the next generations of workers.

The poor financial health of American workers is not a simple matter. The causes and their impacts are all interconnected, which makes the case for retirement and employee benefits professionals to combine their best thinking to devise a cure that benefits everyone. Shared imperatives should be the basis of a smart financial wellness strategy.

Here’s how such a task force can start tackling the issues.

First, determine the scope and nature of employees’ financial pressures. It starts with identifying specific needs of employee segments, and getting more granular than conventional wisdom on, say, who owns student debt. Personal analysis provides a deeper perspective, based on factors such as life and career stage, education, lifestyle and goals. Look at the voluntary benefits lineup and what’s being used by whom. Surveys can help. The more you dig, the better the insights for creating a suite of solutions.

To this end, be aware of the specific financial impacts of the pandemic on employees. More than half of Millennials and Generation X employees in the 2021 “PwC Employee Financial Wellness Survey,” for example, expected to use their retirement plan funds for non-retirement expenses. Providing financial guidance is an enormous common need. Over 90% of people responding to the John Hancock survey said financial guidance would help them even more than a larger employer contribution to their retirement plan.

Second, audit the current plans to make sure needed benefits aren’t hidden from view. Legal insurance and financial resources are often part of retirement plans, voluntary benefits and employee assistance programs (EAPs). These and other financial supports may get more traction if they are repackaged under an existing and coherent financial wellness plan—and if they are promoted. At the same time, it’s not necessary to break the bank providing benefits under the plan. In fact, most voluntary benefits aren’t funded by employers. Just offering them under the employer umbrella helps. And don’t forget the role of tax breaks. An employer’s contribution to employees’ student loan payments is tax-free up to $5,250.

Third and finally, communicate, communicate, communicate. This is the key to any successful benefits program, and the same is true for one focused on financial wellness. Messaging should be driven out in relevant channels, whether that’s email or voicemail campaigns or even on a specific features website where employees can explore the solutions being offered. It’s also worth devising an engagement strategy. Any incentive can be built into it, such as a gift card or a bigger grand prize, to encourage enrollment.

Everyone benefits when employees have the necessary tools to gain command over financial basics, whether that’s setting goals or budgets, setting financial priorities or paying off debt. A financial wellness plan that reflects the thinking and resources contributed by retirement and employee benefits experts will go a long way toward addressing a longstanding problem.

About the authors:

Daniel Bryant is the president of retirement and private wealth for Sheridan Road Financial, a division of Hub International.

Heather Garbers is a vice president of voluntary benefits and technology for Hub International, where she is responsible for driving voluntary benefits sales and strategy.

Editor’s note:

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.

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