Perspective: Emerging Challenges for Plan Management
There’s a growing recognition that retirement plan managers are under the gun because of new legislation as well as increases in employee mobility and auto-enrollment.
But over the past year, another negative force has begun, albeit insidiously, to impact the industry.
The fallout from the sub-prime mortgage crisis is taking its toll on retirement plans. Results of the 2007 survey[1] indicates that workers are more concerned about falling home prices, rising debt, and keeping up with monthly expenses than with saving for retirement. As fewer employees participate (or start saving at a lower rate), average plan balances drop, and servicing costs increase.
The survey also reveals that these employees rely more on their plan sponsors and administrators for information and decision-making help than on any other source. That makes a thorough understanding of the fiduciary risks involved, particularly as they relate to former employees, all the more important.
In addition, when terminated employees leave money in a qualified retirement plan, they retain the same legal rights as active participants. That’s not necessarily a big issue when the number of ex-employees is small. But those inactive accounts often become a substantial portion of a plan’s participant base.
The documents inactive participants are entitled to include Summary Plan Descriptions (SPD), material modifications to the SPD, the Summary Annual Report, notice of all IRS filings, participant statements, and if requested, the Plan document and the entire Form 5500. Of course, every investment and provider change, including fund replacements, additions, or deletions, must also be communicated.
Successfully managing liability exposure during a provider change is especially important. Complete communication regarding such changes, including the black-out notices that are distributed to active employees, is essential. In recognition of the problem, the Department of Labor sponsors a national campaign to educate employers and service providers about fiduciary responsibilities. The latest initiative in the series, “Getting It Right – Know Your Fiduciary Responsibilities,” available as a Webcast (PPA Update Webcast), deals with some of the common problems found by the Employee Benefit Security Administration (EBSA).
In addition to the communication challenges posed by ex-employees, there is a real financial downside when the ratio of former to current employees increases. Those costs associated with servicing inactive accounts add up. When they are properly addressed, through roll-outs and rollovers, they can quickly turn into substantial savings in plan administration costs.
One final word of warning – while difficulties in locating ex-employees mean extra work and additional costs, a complete inability to find those workers can lead to potential legal issues. Terminated workers with a grudge against former employers have been known to base law suits on the non-receipt of plan information.
Spencer Williams is President and CEO of RolloverSystems, an independent provider of rollover services. Spencerjoined RolloverSystems in 2007. Over his career, Spencer’s experience spans starting, building and leading businesses in the financial services industry. Prior to joining RolloverSystems, Spencer served in numerous roles with MassMutual from 1997 to 2007, including founder and CEO of Persumma Financial, LLC (a MassMutual Financial Group company) and as a leader in creating and building the company’s retirement income and rollover IRA lines of business.