DOL's new guidance on 'abandoned' 401(k)s: American Retirement Association responds

After the Department of Labor updated a rule regarding distribution of assets from bankrupt companies’ retirement plans in May, the American Retirement Association (ARA) has now offered a response to improve the DOL’s Abandoned Plan Program.

After the DOL sidelined the rule for over a decade, the agency amended the Abandoned Plan Program, originally adopted in 2006, so Chapter 7 bankruptcy trustees can distribute assets from bankrupt companies’ retirement plans to workers and retirees. The effective date of the plan was July 16, according to the Federal Register.

While the ARA supports the DOL’s expansion of the program to provide a more effective and efficient procedure for Chapter 7 trustees to terminate plans of bankrupt plan sponsors, the association offered two recommendations “to protect plan participants,” wrote the ARA in a letter to the Employee Benefits Security Administration:

No. 1: Expand the qualifications of eligible designees: Under the DOL program, only a plan asset custodian or someone who has served as a bankruptcy trustee within the previous five years can serve. “This limitation is unduly restrictive and should be expanded to include anyone eligible to appear before the bankruptcy court,” the letter read. “Permitting this broader class of eligible designees would permit interested parties to develop specialized skills in handling plan terminations, which would result in more effective and efficient [plan] terminations.”

No. 2: Recognize the conflict of interest that can arise if the same bankruptcy trustee is assigned to represent the interests of the estate: The DOL rule addresses the conflict of interest, however, the problem arises when the “delinquent contributions (including both employee and employer contributions) are more than de minimis,” wrote the ARA. [The DOL defines “de minimis” as “not more than $2,000 in delinquent contributions, or if collectable property in the bankruptcy case is not more than $2,000.”]

“This threshold is significantly understated,” said the letter. “ Not only would typical rates in metropolitan areas likely be greater than $2,000, the threshold entirely ignores the cost to participants of delayed plan termination … Filing a claim for contributions will mean that the plan is not terminated until the claim is resolved, which can take more than a year. As a result, the actual cost of pursuing a liquidated claim for contributions is closer to $15,000 or more.”

Related: New DOL guidance on ‘abandoned’ 401(k)s improves retirement plan payouts

“These changes will get promised retirement savings into the hands of workers and their families more quickly and efficiently and fulfill the commitment their employer made to its plan participants,” said Lisa M. Gomex, assistant secretary for employee benefits security, when the interim rules were announced in May.