Perspective: The Five Biggest Mistakes Advisers and Sponsors Make When Terminating a Plan

The volatile economy has increased the urgency behind this year’s terminated plan season.

Mergers, acquisitions, and corporate insolvency abound, creating a rush to liquidate plans by year’s end. But in this hurried environment, it’s easy to make a mistake. It only takes one disgruntled participant who feels you mishandled his nest egg to call your compliance into question. Be proactive. Help your sponsors avoid these five common, pitfalls and they’ll know it was you who steered them clear of danger.

1. Starting with an end date in mind
When you look back to assess the success of your plan termination, the number one criterion you need to gauge is how completely you satisfied the applicable DoL and IRS regulations. Unfortunately, no matter how you distill it, navigating this maze is different for every plan. Instead of starting with an end date in mind, first check DoL and IRS regulations, then re-check your plan documents. Only after you have a firm grasp of the requirements ahead of you can you arrive at a reasonable plan termination date.

2. Failing to document–or even conduct–a proper missing participant search
The DoL spells out four communication procedures for locating plan participants before you can roll their assets into a safe harbor IRA. Failure to document your progress through these exhaustive and time-consuming requirements could represent a breach of fiduciary responsibility. If you don’t have the communication infrastructure to conduct and document a thorough missing participant search, utilize the services of a provider who does.

3. Using a vendor who has a cookie-cutter approach to terminate a plan
403(b), 457, and Roth plans all have different considerations than traditional 401(k) plans. Additionally, plans that terminate due to acquisition could require different measures than plans that terminate from corporate dissolution. No two plans are the same. Again, go back to the regulations and analyze how each applies specifically to your plan. If you use a third-party service, choose experts whose process is flexible enough to account for each unique plan.

4. Failing to consider the participants’ best interests
Your sponsors set up their DC plans in the first place for the benefit of their employees. Plan termination can be a stressful event for participants. Communicate to both active and former employees often. Set up an outreach program for participants to get independent and unbiased help with their retirement planning. When setting up this program, or when choosing a service provider, make sure the emphasis is on participant choice, with a wide range of retirement options to choose from. From a fiduciary and ethical perspective, the last thing you want to do is compel already stressed participants to choose from only one or two investment options. By planning this process from the participant’s perspective you will be doing the right thing, keeping participants happy, and helping yourself by avoiding questions that likely will only surface later when participants feel their interests were not served.

5. Not properly defining success upfront
Terminating a plan takes a lot of work, a lot of planning, and a lot of time. Not surprisingly, most advisers choose to outsource the work with service providers. When you do this, define success ahead of time. A successful plan termination process should:

  1. Satisfy all regulations.
  2. Be flexible enough to accommodate each unique plan.
  3. Provide participants, regardless of balance size, help in making an informed decision on what to do with their retirement balance.
  4. Document the entire missing participant process.
  5. Roll non-responsive participants into a compliant safe harbor IRA.
  6. Provide responsive participants independent and unbiased retirement options.

This is your opportunity to be the expert and guide your sponsors through their plan termination. Remember that this process needs to reflect your participants’ best interests. Terminated plans often involve automatic rollovers of high-balance accounts. If a participant feels you made the wrong decision on his or her behalf, without proper notification, you may find yourself involved in litigation. Be proactive, plan things out, define your success upfront, and you’ll navigate your sponsors through this maze worry-free.


Spencer Williams is President and CEO of RolloverSystems, an independent provider of rollover services. 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, 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.


© 2008 RolloverSystems, Inc. This article is protected by copyright law. Any redistribution or commercial use in whole or in part is strictly prohibited without the express written consent of RolloverSystems, Inc. The information provided herein is for educational and informational purposes only and should not be considered investment advice.