RSI Publishes Guide for Plans Looking for an Exit Strategy

Rollover platform provider RolloverSystems Inc. has published a best practices guide for plan sponsors who are contemplating a 401(k) plan termination.

The Charlotte, North Carolina-based firm noted that employers who terminate 401(k) plans due to economic reasons such as business closures or mergers and acquisitions, “run the risk of violating regulations and jeopardizing their employees’ future retirement readiness by mismanaging the complex process of shutting down a plan.”

“Terminating a plan is, unfortunately, becoming increasingly common due to the economy, and terminations most often involve small businesses that lack the staff and expertise to conduct a termination properly,” said Jim Langenwalter, RSI’s chief marketing officer, in a press release. “While many plan sponsors and plan advisers do their best to follow the guidelines for terminating a plan correctly, the process can be complicated, time-consuming and much bigger than expected, leaving them exposed to risk.”

RSI has developed a “best practices” guide to provide employers, plan sponsors and plan advisers with direction. Available for free (registration is required), Plan Discontinuance: Best Practices for Defined Contribution Plan Fiduciaries and Advisors looks, among many things, at the five most common mistakes that plan sponsors make when terminating a plan.

According to RSI, those five most common mistakes are (in their words):

  1. Beginning the process with an unreasonable or overly aggressive end date in mind. Because each type of defined contribution plan requires different treatment according to Department of Labor (DoL) and Internal Revenue Service (IRS) regulations, it’s important to set a realistic and reasonable end date that will enable you to complete the process completely and accurately.
  2. Failing to document—or even conduct—a proper missing participant search. The DOL spells out four communication procedures for locating plan participants, and sponsors must try each of the four before they can roll a participant’s assets into a safe harbor IRA. Failure to document progress through this exhaustive and time-consuming process may result in a breach of fiduciary duty.
  3. Using a cookie-cutter approach to discontinue a plan. 401(k) plans have different considerations than 403(b), 457 and Roth plans. Additionally, plans that terminate due to acquisition might require different measures than plans that terminate from corporate dissolution. Knowing the differences and which regulations apply to each type of plan is crucial.
  4. Failing to consider the participants’ best interests. Communicating with participants and providing them with assistance and investment options is an integral part of the process. It is best to give participants the opportunity to receive independent and unbiased help with their retirement planning, to have high-quality, low-cost options from which to choose, and to choose a conservative, low-fee Safe Harbor IRA that preserves participant capital and future flexibility.
  5. Not properly defining success in advance.

“We expect the current economic downturn to continue to cause many 401(k) plan sponsors to discontinue their plans,” added Langenwalter. “Although official numbers on the trend are hard to come by, we have seen an increase in the number of plan sponsors and advisors seeking our help in discontinuing their plans over the past 12 months. We’re hoping our guide makes it easier for plan sponsors and their advisers to either follow best practices themselves or to knowledgeably outsource the work to a service provider and avoid potentially damaging mistakes.”

The guide is available at