Automatic Rollovers Not Just for Active Plan Cleanup

August 27, 2014 ( - Implementing an automatic rollover program can help retirement plan sponsors establish safe harbor individual retirement accounts (IRAs) for missing or non-responsive participants.

“With companies that implemented auto enrollment, participants may not even know they have an account, so these programs have been more needed in the last five or so years,” B.J. Ralston, chief compliance officer with Wealth Management Systems, Inc. (WMSI) in New York, tells PLANSPONSOR.

Automatic rollovers can be beneficial for sponsors of terminating as well as active defined contribution (DC) plans. They provide the ability to transfer all missing and non-responsive participants, regardless of balance, and enable plan sponsors to “close out” the plan, WMSI notes in a white paper, “Trends and Best Practices for Addressing Automatic Participant Rollovers.” In addition, for defined benefit (DB) plans, an automatic rollover program can be an important first step in cleaning up employee data records prior to the launch of a cash-out window or pension risk transfer solution.

Jacqueline Rynn, chief marketing officer at WMSI in Boston, tells PLANSPONSOR when a plan is terminating, a plan sponsor may roll over the balance of a missing participant without consent even if that balance is greater than $5,000, but the plan sponsor must first provide notification to the participant and otherwise meet Department of Labor (DOL) requirements. The safe harbor requirements for terminated plans are similar to those for active plans, but the plan must be an individual account plan—it cannot be a DB plan subject to the Pension Benefit Guaranty Corporation (PBGC) insurance program.

For terminated plans, if the participant notification is returned as undeliverable, the plan must take steps to try to locate the participant or beneficiary. If these location efforts are unsuccessful, the participant or beneficiary is deemed to have been furnished the notice and failed to make an election within 30 days.

The DOL recently issued guidance addressing ways for fiduciaries of terminated DC plans to fulfill their obligations under the Employee Retirement Income Security Act (ERISA) to locate missing participants and properly distribute participantaccount balances.

The DOL’s Field Assistance Bulletin listed methods these plan sponsors can use to search for missing or non-responsive participants, but some plan sponsors may want to consider using a search service. “It depends on the particular plan situation,” Rynn says. “If the plan has years of small balances on record, it makes sense to hire a search service. That is what drives the decision about the search method.”

As an example, Rynn explains that plan sponsors in certain industries may have high turnover. If the plan sponsor has had an automatic rollover program in place, staying on top of and managing small terminated plan balances on a regular basis, then the sponsor may not feel the need to use a search service. But, if a plan sponsor has not been automatically rolling over balances, and these small balances have built up in the plan over time, the sponsor may want to use a search service to first update and clean up bad address information to ensure a higher percentage of participants receive notifications as part of their process flow.

Search service providers WMSI has interacted with include Lexis Nexis, Melissa Data, IDology and Risk Compliance Performance Solutions. Each has varying service offerings and fee structures (monthly fee plus transaction fees or fixed licensing fees based upon permitted range of address retrievals). Most use public databases to retrieve and update address information including: post office, magazine subscription lists, businesses, bankruptcy, driver’s license, directory assistance, reverse look up, and civil court databases, among others.

Balances greater than $5,000, depending on the size of the account, may warrant a plan fiduciary taking some additional steps to find the participant, John Geli, CEO of WMSI in New York, tells PLANSPONSOR.

In general, Ralston adds, if there is no response from a participant or the plan sponsor hasn’t found a participant within the 30-day time frame of the participant notification, the plan sponsor can go ahead and roll over the balance.

Rynn notes that some recordkeepers are flagging bad addresses on file and a plan sponsor may work out an agreement with its recordkeeper to do a search before sending out notifications. The recordkeeper can extract data for these accounts, and a rollover services provider such as WMSI can pass the data to its partners, which will search and update addresses. If this is done before notifications are sent, chances are a higher percentage of participants will receive the notifications, Rynn says.

Preparing for Pension Risk Transfer

In recent years, more DB plan sponsors are making moves to de-risk their pension plans in addition to using liability-driven investing strategies, including offering lump-sum windows to a subset of terminated or retired participants or purchasing an annuity as part of a pension buy-in or buy-out solution.

In the case of a lump-sum window offering, plan sponsors must fully explain all options to plan participants and provide the appropriate tools and services to help participants make informed decisions. Before offering the lump-sum window, plan sponsors can implement an automatic rollover program to clean out small balances to reduce the number of participants to whom it must provide communications, Rynn says.

According to Rynn, DB plan sponsors that plan to offer a lump-sum window may want to go ahead and leverage search services because DB plans have much fewer ongoing communications with terminated participants than DC plans, so there may be more out-of-date addresses. Using a search service to update information can increase the chance of participants receiving notifications, and maybe increase the number who choose a lump sum distribution. See “DB Lump-Sum Windows Require Much Preparation.”

Plan sponsors considering a pension buy-in or buy-out can turn to an automatic rollover program or search services to help reduce plan liabilities and clean up data, as well as help ensure participants receive communications, she adds.

Deciding on an Automatic Rollover Provider

Rynn says, from WMSI’s experience, it seems plan sponsors are not fully aware of the number of providers that have structured their products and fees to comply with the regulatory requirements in order to provide automatic rollover services to retirement plan sponsors. She notes that even the DOL guidance includes steps for plan sponsors that cannot find an automatic IRA provider. In fact, a number of firms provide such services.

According to Geli, WMSI has created a marketplace of firms with different qualifications and services. “Plan sponsors can come to WMSI and almost do a mini RFP [request for proposals] of providers.”

WMSI’s white paper notes that recordkeepers and third-party administrators can also be valuable resources for plan fiduciaries in managing automatic rollovers and selecting an automatic rollover provider.

The white paper can be downloaded from here following a free registration.