Peter E. Preovolos | Pension360

Are You Giving Good Advice Regarding Uncashed Pension Checks?

By Peter E. Preovolos, CEO, PenChecks Trust

The Department of Labor (DOL) and IRS have been, for lack of a better word, unclear on its guidance to pension plan sponsors and third party administrators (TPAs) when it comes to uncashed pension checks. These checks, while cut, have not been received – let alone deposited – by individual participants. What happens instead is concerning from a fiduciary standpoint, and could be big trouble if discovered in an audit.

Uncashed checks are typically dealt with in very precarious ways. The custodian (or in rare cases, a plan sponsor trustee) may wind up holding onto the funds without depositing them back into the plan, generating interest on the float as a result. Other scenarios are that the funds are deposited erroneously into the pension plan’s forfeiture account or rolled over into an IRA account without restoring the taxes.

None of these are legally viable. Plan sponsors and their administrators have an inherent responsibility to ensure that participant distributions are received by the intended participants. It is a breach of fiduciary responsibility to allow a custodian to sit on non-negotiated assets and earn float. Sadly, all too often, such is not the case. Granted, TPAs and plan sponsors must grapple with many gaps in the current regulations. Case in point, the DOL has often stated that withheld taxes are still considered qualified plan assets, though there are no regulations that specifically support this position. Furthermore, if the funds in question came from an employee’s salary deferrals, and the institution places those funds into a forfeiture account, there is no expressed authority that can forfeit funds that are 100% vested.

Faced with such ambiguity, many service providers are simply rolling missing participant funds into a Default IRA. However, if taxes have been withheld, even more questions arise as to the legality of such a move since taxed plan distributions are no longer qualified assets.

To arbitrarily ignore or refuse to restore a participant’s full account balance (including taxes withheld) represents a serious violation of an institution’s fiduciary responsibility. Yet, I have even seen cases where institutions return funds to a plan as forfeitures even when the plan does not contain provisions for how the funds should be managed. In my opinion, this runs the risk of setting the plan up for potential disqualification or intense scrutiny by the DOL, IRS or both.

Given all of this, I offer the following positions as the most prudent to adopt when dealing with uncashed participant distributions.

If funds have gone unclaimed for more than 90 days:

The participant is owed interest on their money.

If taxes have been withheld, the issuing institution has an obligation to retrieve those taxes and credit them back to the participant account prior to returning all funds to the plan.
Finally, the plan should reinstate the participant’s full account (including interest from the custodian) or establish a compliant Safe-Harbor Default IRA.

The problem of how to handle unclaimed funds can be significantly mitigated when TPAs and plan sponsors accept their role as a gatekeeper and properly monitor and manage benefits that are paid. In particular, these entities need to ensure that each benefit payment made from the trust is closely followed until properly negotiated, returned to the plan, or placed into a Default IRA after withheld taxes have been restored. When TPAs and plan sponsors adopt a responsible and diligent stance on uncashed plan distributions it can protect from possible violations of the law, upholds fiduciary responsibility, and ensures retirement assets are protected in the best interest of participants.

About the author: Peter E. Preovolos is CEO of PenChecks Trust, a 20-year provider of distribution services and unique solutions to the retirement plan industry. PenChecks Trust has been a leading innovator in developing commercial-scale, compliant solutions for missing participants and uncashed checks. PenChecks Trust helps institutions, administrators, advisors and plan sponsors save time, reduce risk and eliminate costs. Peter can be reached at peter.preovolos@penchecks.com.

Photo by Roland O’Daniel via Flickr CC License

Are You Prepared For Industry Compression?

By Peter Preovolos

In case you haven’t noticed, the retirement plan third-party administrator (TPA) industry is shrinking. In the past 10 years, the number of TPA providers serving the market has significantly declined as the smaller firms either voluntarily exit the space or get driven out by larger, more scale-efficient competitors. There are three primary factors driving this cycle of compression:

Fee pressures: Recent Department of Labor (DOL) regulations regarding fee disclosures are contributing to the downward pressures on TPA service fees, and therefore lower margins.

Mergers and acquisitions: M&A activity in the industry has heated up, and shows no signs of slowing down.

Economies of scale: As the largest institutional players get even bigger and more efficient, they can afford to lower prices for plan administrative services by driving plan sponsors into “one size fits most” models.

A Time of Threat….and Opportunity

As the industry continues to compress, TPAs will face increasing pressure from institutions that can provide record keeping and plan administrative services at lower prices. Instead of competing primarily with each other, TPAs will increasingly be forced to go up against large record keepers who can also bring economies of scale to third-party administration.

As administrative fees fall even lower, larger record keepers may also enjoy the advantage of using them as a “loss leader” to win new business. For example, if a plan sponsor signs up for record keeping, custodial and investment management services, large record keepers may include plan administration services at reduced or possibly even no cost.

Not a very rosy outlook for many TPAs – especially for smaller ones trying to figure out how to compete in this changing marketplace. But it also brings to mind the old saying that crisis is often an opportunity in disguise.

What Can TPAs Do?

In response to these trends, there are at least three key strategies that TPAs can employ to still thrive:

Refocus. Some TPAs may decide they no longer want to serve larger plans. Others may choose a narrower target market by focusing on a specific type of plan sponsor, such as professional practice groups.

Merge or acquire. Combining resources, expertise and customer bases can enable smaller companies to achieve the economies of scale needed to survive the industry transition.

Differentiate by service, not price. In a mature industry, companies can compete on price or service, but not usually both, or at least not equally well. For smaller TPAs, this means focusing on personalized service that larger, less agile companies can’t provide. This could include promoting staff to acquire specific industry education and technical certifications as well as leveraging software and outsourced solutions to expand service capabilities.

Most retirement plans in the U.S. are held by small to mid-sized companies. Lacking internal plan administration skill and resources, many of these plan sponsors will continue to need the expertise TPAs can offer to truly get the most out of their plans. For smaller TPAs, the key to survival may hinge upon delivering a high level of personalized services to those plans.

Where Does the Industry Go From Here?

Currently, all signs point to continued compression within the industry. As a result, TPA companies will need to pursue greater economies of scale to overcome shrinking margins. This will drive more M&A activity, which will continue to put pressure on fees. As costs go up and fees go down, some companies may be forced to cut services, offering their customers fewer choices.

And that’s where the opportunity may lie for independent TPAs. Through ongoing innovation of products and services combined with exceptional customer service, smaller TPA firms may be able to carve out specialized niches where customers truly value their specialized services.

For some TPAs (large or small), the best solution may be to leverage outsourced solutions to fortify their position in the market and strengthen their relationships with customers through improved service.

Either way, the time is now for independent TPAs to start planning ahead in order to retain control of their own destinies. Otherwise, industry compression may ultimately decide their futures for them.

About the Author:

Peter E. Preovolos is CEO of PenChecks Trust, a 20-year provider of distribution services and unique solutions to the retirement plan industry. PenChecks Trust has been a leading innovator in developing commercial-scale, compliant solutions for missing participants and uncashed checks. PenChecks Trust helps institutions, administrators, advisors and plan sponsors save time, reduce risk and eliminate costs. Peter can be reached at peter.preovolos@penchecks.com.

Photo by Roland O’Daniel via Flickr CC License

What the 401(k) Supreme Court Decision Means to Plan Trustees

By Peter E. Preovolos, President, PenChecks Trust

The U.S. Supreme Court recently rendered a decision that could greatly impact retirement plan trustees. For TPAs, this decision provides an opportunity to add additional value to your plan trustee clients. But first let’s look at the decision.

On May 18, the Supreme Court held that fiduciaries who select investment options for 401(k) plans have a continuing duty under ERISA to monitor their selections and remove imprudent options.

In supporting its decision, the Court noted that under the law of trusts, a trustee has a continuing duty to monitor trust investments and remove imprudent ones, and that this duty exists “separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.”

As a result, a claim alleging that a fiduciary failed to prudently monitor and remove the investments can still be deemed timely as along as the alleged failure to monitor occurs within the ERISA-defined limitations period.

It’s Not All Bad

What does this mean to plan trustees?

The bad news is the Supreme Court ruled that trustees can be held responsible for imprudent plan investments that were made by someone else or that were made before they became a trustee. In other words, trustees have an ongoing responsibility to monitor plan investments regardless of when and where they were made.

For example, suppose an investment was made 20 years ago, long before the current trustees came aboard. Even if a suit was not brought within six years of the initial investment (or whenever the fiduciary breach was discovered), the current trustees can be held responsible for not having monitored the investment and removed it from the plan once it was deemed imprudent.

The good news is that the Supreme Court ruled in favor of the traditional 6-year “look-back”period for filing claims of fiduciary imprudence. They opined that although trustees are continually responsible for monitoring plan investments, they can only be held liable for damages going back six years. However, the Supreme Court sent this portion of the case back to the lower court for further review. So the ultimate outcome of their decision remains to be seen.

Create Value By Educating Clients

In the meantime, as a TPA you have a great opportunity to reinforce your value to trustee clients by educating them about their fiduciary duties. Most trustees are not retirement plan professionals, and have little understanding of their fiduciary responsibilities. You can improve their understanding by teaching your clients about their fiduciary obligations, especially as they relate to this Supreme Court decision.

Start by making them aware of the Supreme Court ruling and how it impacts their duties as trustees for the plan. Explain what terms like “prudent”mean and how they can be held liable for handling plan investments in an imprudent manner. Most of all, make them aware of the importance of timely action should they determine an investment has become imprudent or if they note other trustee actions that could prove harmful to the plan.

Pay attention to what happens with this case when it goes back to the lower court so that you can update your clients in a timely manner. And if you really want to add value, periodically remind your plan sponsor client to work with the Plan’s investment advisor to review the fees, performance and suitability of the Plan’s investments. Most TPAs don’t offer this service, even though doing so can serve as a powerful differentiator at contract renewal time.

With more TPAs expressing an interest in becoming 3/16 Plan Administrators, it seems that the industry as a whole is raising its level of awareness regarding fiduciary responsibilities –a trend that is long overdue.

The more we educate our clients about these issues and help mitigate their fiduciary risks, the more they will recognize and appreciate the tremendous value we bring to the table.

About the author: Peter E. Preovolos is President of PenChecks Trust, a 20-year provider of a complete suite of retirement distribution services to help institutions, administrators, advisors and plan sponsors save time and money while serving their clients more effectively. He can be reached at peter@penchecks.com.

Gavel photo by Joe Gratz via Flickr CC License