Ask the Experts November 21, 2023

Can a Terminated Employee Roll Over Assets To a Sister Company’s Plan?

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

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Q: We sponsor a 401(k) plan. We have an employee who terminated and was subsequently hired by a sister company (we are both subsidiaries of the same parent, but we have separate 401(k) plans.) The employee has requested a rollover from our plan now that she has been hired by our sister company. Since the employee has terminated with our company, are we allowed to let her roll over her money?

Kimberly Boberg, Taylor Costanzo, Kelly Geloneck and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: Generally, a plan can distribute benefits when there is a “distributable event.” Separating from an employer is typically considered a distributable event, which would allow employees to roll over money from their prior employer’s plan into their new employer’s plan. However, if the employee is moving within the same controlled group, this is not the case, because, under Internal Revenue Code section 414(b), all employees who are members of the same controlled group are considered to be employed by a single employer. See also IRS Notice 2002-4; IRS General Counsel Memorandum 39824. Additionally, Treasury Regulation section 1.401(k)-1(d)(6)(ii), Example 2 states that if you remain in the same controlled group, you have not had a distributable event and therefore a rollover would not generally be allowed.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

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Benefits November 20, 2023

Analysts Agree IBM Pension Thaw Benefits Both Participants and Plan Sponsor

IBM’s decision to unfreeze its pension is a ‘strong endorsement’ of plan sponsors operating parallel defined contribution and defined benefit retirement plans.

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IBM’s decision to unfreeze the company’s cash balance plan is heating up conversations across the defined benefit pension world as to whether other firms—including IBM’s competitors—will follow suit.

Long-term U.S. corporate pension funding status models keep climbing, presenting fertile grounds for plan sponsors to consider whether to open or enhance their defined benefit plans.

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IBM thawing its company cash balance plan supports workers, is an efficient and effective allocation of resources to retirement benefits and indicates that large plan sponsors nearing full funding status may act to maintain their defined benefit plans, says Jared Gross, head of institutional portfolio strategy at J.P. Morgan Asset Management.

“IBM really has stepped up with something that is very progressive and, ultimately, more efficient for probably just about everyone involved, both the participants and the sponsor,” he says.

IBM representatives earlier this month announced that the company will end 5% matching contributions and 1% automatic contributions to employees’ 401(k) accounts. Instead, starting in 2024, IBM is reopening the company’s DB pension plan that had been closed to new entrants since 2004.

“If you step back a few years, and you look at the common critiques of traditional DB plans, it was … often that the final average pay structure was outdated and the slow vesting was not attractive to workers who may move from job to job,” Gross says. “They’ve essentially solved both of those problems with this plan design.”

Zorast Wadia, a principal in and consulting actuary at Milliman, agrees with Gross that IBM’s reopening of the DB plan is good for both the company and employees because it equitably spreads the risks of preparing for retirement.

“The whole idea behind [the cash balance plan] is to have more of a cost-sharing relationship between the employer and the employee,” Wadia says. “It’s unlike what we call the dinosaur plans of the past—the final average earnings types of plans that were highly leveraged on additional pay and service—and cash balance plans don’t work like that [because] they’re essentially unit accrual plans.”

In a cash balance plan, employees accrue assets in two ways: a pay credit linked to compensation (the employer contribution) and a guaranteed interest credit based on performance of an index or asset, like the one-year Treasury bill rate. As in a traditional DB plan, the employer bears the risk of investment performance.

Data on DB trends show that a specific set of plan sponsors are likely to continue pursuing terminating their DB plans entirely, as 22% say ending the plan is a long-term goal, while maintaining the plan over the long term is a goal for 78% of survey respondents, according to recently published data from Aon PLC. Separate research by MetLife earlier in the year, however, found that nearly 90% of plan sponsors in that survey intend to divest all of their DB pension liabilities.

“While we see U.S. private sector pensions maturing, they are not going away,” the Aon report stated. “Most are moving toward lower risk positions to reduce their impact on the plan sponsor.”

Overall, assets in private sector pension plans have decreased over the last 10 years, dropping 14.8% to about $3.7 trillion in 2022 from about $4.3 trillion in 2013, according to data from the Congressional Research Service.  

For IBM, the move to thaw the cash balance plan while maintaining a defined contribution plan is a strong endorsement of the idea “that plan sponsors will want to operate DB and DC plans together,” Gross says.

Although IBM is “not the first [plan] sponsor to reopen a pension plan, … certainly among the large, Fortune 500, broadly known, mega plans, they are the first that we’re aware of, so there’s a signaling effect, of course, and we expect that they will not be the last,” he says.

“Many large plans are approaching full funding” after a prolonged period of being underfunded, and some have gone into surplus status, according to Gross.

IBM’s decision to thaw the DB plan “is a tangible example of a thoughtful sponsor making use of a pension surplus in an extremely efficient way, and because IBM is widely understood to be among the most thoughtful pension sponsors, this should resonate with the broader community,” Gross says.

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