In Practice May 19, 2014

Advisers Can Wave Red Flags, Too

It’s well known that federal auditors look for red flags to target review efforts, but one service provider says retirement plan advisers should use them for better business planning.
Reported by

It may seem counterintuitive, but red flags can actually be an attractive prospecting feature, Eric Ryles, managing director of Judy Diamond Associates, tells PLANADVISER. His firm recently examined about 550,000 401(k) plans and found striking similarities in the issues keeping advisers’ clients up at night.

For example, nearly a third of the plans show employer contributions that rank in the bottom 10%, based on the value of the employer contribution.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

An adviser whose value-add is to drive down administration costs can use this data, Ryles says. “He can offer a cost-effective strategy for boosting the employer match and really increasing the attractiveness of the plan. That’s more effective than targeting happy, healthy plans.

“It goes without saying that you need to be ready to deliver what is promised,” Ryles adds.

The five most common tripwires are if the plan:

  • Falls in the bottom 10% for value of employer contributions (184,442 plans);
  • Shows high average account balances (109,287 plans);
  • Was recently terminated but still has large numbers of participants (68,222 plans);
  • Recently reduced employer contributions (63,694 plans); and
  • Previously issued corrective distributions (63,349 plans).

Plans that trigger these red flags typically make better sales prospects than those with a clean bill of health, Ryles says, adding that the firm’s Retirement Plan Prospector tool is one way for advisers to access Form 5500 data and start picking out these or other red flags. Benefits staff supervising troubled plans are more likely to seek change, he explains. It makes sense for advisers to focus on the segment and bring highly targeted solutions to address specific problems.

Plans with high average account balances can be an opportunity, Ryles says.

“You can come in and say, ‘I know you’re getting beat up on asset-based fees because of the high average account balances—let me talk to the participants about the pros and cons of rolling their assets into an IRA when they retire, and the other options they may have for exiting the plan,” Ryles says. “This is just an example. You want to demonstrate that you’re aware of the plan’s problems, and that you’re bringing the solution.”

The Judy Diamond report identified 17 unique triggers that can represent useful sales tips, Ryles says.

“There are some that are really interesting, but they’re not hugely prevalent,” he explains. “If the plan experienced a loss in the previous year due to fraud and dishonesty, for example, that’s a critical red flag. It’s a relatively small number of plans, but if you want to find a new plan client, find an HR director who lost money last year due to fraud.”

Data prospecting tools come into play here, Ryles says. Probably hundreds—not thousands—of the 550,000 plans suffer losses from fraud and dishonesty, so they will be hard to find. “That’s the value of this kind of tool,” he says.

Ryles says growth-oriented advisory firms should constantly seek ways to winnow potential prospects “to the maybe 10% that are seriously thinking about switching this year. If a plan has a score of 85 out of the 100 rating system we use, they’re not going to be ready to switch. But we can help you find the plans that score 50 or 40. Those should be the target.”

Large amounts of corrective distributions are another obvious red flag, Ryles says. A common reason for corrective distributions is that rank-and-file employees are not contributing enough, which causes problems with nondiscrimination testing.

“If the owner of a 10-person firm wants to max out his 401(k) this year, and if five or six of the employees aren’t participating in the plan, he probably won’t be able to do that and still pass the nondiscrimination requirements,” Ryles explains. In these cases, excess contributions are returned as a corrective distribution, often causing the business owner to become irritated with their plan's design and performance. 

“When this situation occurs, advisers can say to the HR director, ‘I see you’ve got a bunch of highly compensated executives that are angry. Their plan isn’t working like they want it too,’” Ryles says. “Let me show you my solution.”

Low participation is an added problem, he says. “Your pitch becomes, ‘I’m the 401(k) education guru, let me come in and give my seminar and your participation rate will go up, and next year, you’re CFO and the President can contribute the maximum amount no problem.”

Advisers may feel reluctant to adopt clients first identified through red flags, Ryles says, but satisfied clients are rarely going to switch providers. So it’s a matter of finding the right opportunities—where the adviser's skillset can make a difference.

“We look at these red flags more as a benchmark,” Ryles explains. “They tell us where a plan sits in the universe and how the adviser can contribute.”

Data & Research May 16, 2014

Best Practices for Handling Uncashed Checks

Some plan sponsors are unsure about best practices for handling uncashed retirement plan benefit checks, but a new paper aims to help.
Reported by

There is no clear guidance from the U.S. Department of Labor (DOL) or the Internal Revenue Service (IRS) on all aspects of the uncashed checks issue (see “Unanswered Questions About Uncashed Checks”). Regulations allowing plan sponsors to roll participant accounts of less than $5,000 were passed in 2001 and put into effect in 2004 (see “DOL Announces New Automatic Rollover Regulations”), but Lowell M. Smith, Jr., president of Inspira, an individual retirement account (IRA) recorkeeper based in Pittsburgh, Pennsylvania, that offers an automatic IRA solution for plan sponsors, tells PLANADVISER at the time there were few providers available for plan sponsors to work with, and especially few that would take amounts less than $1,000.

Although there are more providers in the automatic rollover market now, many plan sponsors never adopted a policy for automatically rolling over participants’ balances due to the lack of providers at the time, and even those plan sponsors that are now automatically rolling over small balances, may not have put cash-out provisions in their plan documents, Smith says. He recommends that as plan sponsors are now amending their plans for Pension Protection Act and other legislation provisions, they should consider adding cash-out provisions. “I would say, even though they can still just issue a check for amounts less than $1,000, they should roll those over too.”

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

Plan sponsors are not allowed to force out accounts greater than $5,000, but problems with uncashed checks for these larger amounts may still occur, Smith says. If a plan is terminated, some participants may not have responded to a notice sent to them and checks may have been sent to wrong addresses. “Plan terminations are the biggest problem we’ve found,” he says. “There could be uncashed checks out there for years. The participant may have died, so now the plan sponsor has to find beneficiaries, pay estates.”

In addition, sometimes plan participants and beneficiaries do give instructions for rolling over balances, but if they provide incorrect instructions, entities accepting rollovers may not be able to find account information and checks go uncashed, Smith notes. A plan sponsor can try to get in touch with these individuals for correct instructions, but sometimes they do not respond, or sometimes they’ve moved.

“Making Sense of the Uncashed Retirement Plan Check Dilemma,” written by Smith, gives providers and plan sponsors the information they need to institute a process for dealing with uncashed checks with which they are comfortable. The paper covers plan asset considerations, the issues arising from a “float” arrangement, searching for recipients and moving the funds.

According to the report, the DOL holds that each distribution remains a plan asset until the check is cashed or a wire transfer is successfully made, so it is incumbent upon plan fiduciaries to work with their service providers and attempt to locate these participants in order to get them to take action.

The report says it is important when framing a policy for handling uncashed checks to keep in mind that most of these uncashed checks are for smaller dollar amounts when determining the search steps that will be undertaken. Some steps can be costly, and since it is permissible and common to charge the accountholder the cost of the search and any check reissuance fees, the fee can severely reduce the amount of benefit to the participant. Given that fact, some policies limit the search process to the following steps:

  • Run a list of all uncashed check names through an electronic search process to determine if a better address can be located.
  • Send a letter to the best known address and wait a period of time—often 30 days after assumed receipt—to move the funds.

 

The paper mentions using the Social Security Administration’s letter forwarding service to help find participants and beneficiaries, but since the time the paper was written, the administration announced it is stopping this program (see “SSA Letter-Forwarding to Be Discontinued”). Some firms have introduced missing participant locator services plan sponsors may use (see “RCH Introduces Missing Participant Search Service”). Smith says this is another reason rolling accounts into an IRA makes sense.

If a check remains uncashed, plan sponsors may decide to restore the participant’s retirement plan account, or may decide to put the assets in a forfeiture account or other holding account with the plan provider. If the assets are restored within the same year, the plan sponsor can attempt to recapture taxes paid. If they do not, the account balance can be earmarked as after-tax or as a rollover, Smith says. There is no guidance saying interest for the time the assets were out of the account have to be applied, he adds. Many plan sponsors also do not put the assets back into the funds from which they came, and put them into the plan’s qualified default investment alternative (QDIA) or other more conservative fund instead.

At times, funds transferred to a checking account for the plan or placed into an account at a service provider awaiting the final transfer of the funds to an IRA or other retirement program, may earn interest—referred to as float income. This income may be retained or used to offset expenses for finding participants, although Smith says the interest earned is usually very small and likely won’t cover such expenses.

In order to avoid a “self-dealing” violation when it comes to retaining float income, the paper says, plan sponsors must:

  • Disclose situations when the float is generated and maintained;
  • Disclose when the float period commences and ends, and adhere to timeframes for mailing checks, electronically transferring funds or any other processes that may affect the duration of the float; and
  • Disclose either the rate of the float or how the rate is determined. An example would be that the float on funds pending distribution is based on prevailing money market rates.

 

The paper contends placing funds from uncashed checks into an IRA created for the benefit of the participant is often the most advantageous. It is clear from guidance by the DOL that uncashed check amounts (minus any fees related to searches) that could qualify for automatic rollover can be moved to an IRA, but it is less clear whether larger amounts can be moved to an IRA. However, some plan sponsors do this as well.

The key takeaway from the report, according to Smith, is plan sponsors should develop a policy for handling uncashed checks and should work with their providers to help them enforce the policy. The paper offers suggestions for what the policy should include. “As long as plan sponsors have a formal process, and it is reasonable, they should be safe with the DOL,” Smith says.

The paper, “Making Sense of the Uncashed Retirement Plan Check Dilemma,” is here.

«