PLANSPONSOR - October/November 2018 - 71

SAXON ANGLE
Handling
Abandoned Plans
The QTA program is in dire need of amendment
A
s those who read this column are likely aware, the
Department of Labor (DOL) has, for more than a decade,
tried to manage the issue of abandoned retirement plans
that is plaguing our retirement system. With the proliferation of
small-employer plans, the issue has become more pronounced.
The DOL maintains a two-pronged strategy for handling
abandoned plans. First, it encourages service providers to use
the Abandoned Plan Program (APP) regulation and exemption,
which permit them to wind up abandoned plans. Where service
providers neglect to participate in the voluntary program, the DOL
will otherwise compel them to use it through enforcement. Thus
far, the APP has proved ineffective in addressing the problem. This
article provides a suggestion for how the APP could be improved
to provide benefits to participants and beneficiaries.
Employee Retirement Income Security Act (ERISA) plans
may become abandoned for several reasons. These include the
plan sponsor going out of business, dying or moving without
notifying the trustee, recordkeeper or other service provider.
Where a plan has been abandoned, the APP gives service
providers a safe harbor from ERISA's fiduciary responsibility
provisions, letting them step in and serve as a qualified termination
administrator (QTA). The APP defines a QTA as a person
who is eligible to serve as a trustee for the issuer of an individual
retirement plan-e.g., a bank, trust company, mutual fund
family or insurance company-and it must hold the assets of the
plan that is considered abandoned.
The APP also provides an exemption allowing the QTA to
roll the participant assets into an individual retirement plan,
which the QTA will sponsor, when participants fail to respond to
the program's various required notices.
In general, the APP requires that the QTA exercise discretion
with respect to the termination of the plan. Among other
things, he needs to determine that the plan is indeed abandoned;
notify the DOL before, during and after the winding up; calculate
and distribute benefits to participants; and file a terminal
Form 5500 on the plan's behalf.
However, the QTA program has been used reluctantly
and sparingly by service providers to ERISA-covered plans.
Importantly, recordkeepers do not qualify to be a QTA under the
APP because, generally, they do not hold the plan's assets, as the
regulation requires.
Others, such as custodians, have established long-standing
The DOL
maintains a
two-pronged
strategy for
handling
abandoned
plans.
business practices and models
that are predicated on avoiding
fiduciary status under ERISA.
Moreover, service providers
that take on fiduciary status
and liability for certain activities,
as in the role of a directed
trustee, often find the APP an
unattractive option because
of the potential for foot faults
under the regulation. In
addition, the administrative
requirements associated with the program make it very expensive
for service providers to administer. The APP maintains
a bevy of administrative and notice requirements that those
without experience are reluctant to tackle.
A simple solution would entail making an amendment to the
APP regulation and permitting those service providers currently
capable of serving as a QTA to help solve for the broader market.
In this respect, many of the abandoned-plan issues may be solved
by permitting custodians, trustees or other service providers to
appoint a third-party QTA, once it is determined that a plan is
abandoned for purposes of the regulation. This would solve the
problem that many service providers have-the lack of interest or
expertise to act as a QTA-and instead allow them to hire third
parties to wind up the plans. Those third-party QTAs may not
currently serve in the role because they hold no assets of the plan.
The market of third-party QTAs already exists, as several
players within the retirement services market maintain the
capacity and ability to step up and serve as QTA to abandoned
plans. These firms have developed internal processes to wind up
such plans on a cost-effective basis and are also willing to take on
the fiduciary risks associated with these procedures.
The hope of the DOL taking action on the issue seems dim
at this point. The APP regulations have been on its regulatory
agenda since 2012. However, if and when the agency does tackle
amending the regulations, this fix may be all it takes to help the
program achieve its potential.
Stephen Saxon is a partner with Groom Law Group,
Chartered, in Washington, D.C. George Sepsakos is an
associate with Groom.
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