Communicating With Terminated and Retired Participants

What communication obligations do plan sponsors owe to participants who have made the decision to leave funds in their retirement account after exiting their company? According to Jeffrey Capwell, a partner at McGuire Woods and leader of the firm’s employee benefits and executive compensation group in the Charlotte, North Carolina area, “There is very little difference, if any, with the fiduciary obligations owed to a ‘term’ [or terminated] vested, as opposed to an active, participant in the plan.”

Capwell continues, “If people have funds in a plan then under ERISA [Employee Retirement Income Security Act], they are treated as participants. A participant is anyone who still has a benefit payable in the plan, and he has all the same rights as other participants. [That means] he has to get the same notices with respect to plan fees and investments; he has to get quarterly statements, a QDIA [qualified default investment alternative] notice if there is a QDIA under the plan. So, in most respects, there is no real difference in obligation for a terminated vested participant.

He also stresses that plan sponsors should maintain good records on terminated vested employees, notably address and how to get in touch with him. His firm encourages employers to confirm at the time of separation that the employment and any plan records are up to date. If a participant is moving, find out the new address, he says.

Jack J.M. Towarnicky, J.D., LLM, executive director of the Plan Sponsor Council of America (PSCA), stresses the need to recognize the exclusivity of each of an employer’s term vested benefit plans.

“I think it is very important to note that each benefit plan is a separate legal entity from the employer,” he says. “Participants need to know that their relationship with the benefit plan is separate from their relationship with the employer. So, while an employer may not have much reason to keep in touch with former employees, the plan sponsor has mandated disclosures and other potential reasons to reach out to workers who have separated.” These may include sending information on COBRA health care coverage, life insurance conversion or what may be done with accrued benefits in excess of $5,000. “Because the 403(b) and 401(k) are intended to be retirement savings plans, by definition, the intended beneficiary of the account will always be a former employee,” he notes.

If a defined contribution (DC) participant is leaving his job, he has several options for his account balance. Usually one of these choices is to leave the money in the employer plan; there may be advantages, particularly if he likes the plan’s investment options, if it has low fees and it will be possible to move the balance to a new employer’s plan later.

Capwell says, “But once a benefit is distributed from the plan in its totality, there really are not any fiduciary obligations to speak of. The only exception is if the employer wants to cash out an account that has under $5,000 and the participant doesn’t offer a directive as to where the money should go. Then the plan sponsor has to select an IRA [individual retirement plan] provider to receive that distribution.” The selection of the IRA provider is a fiduciary decision as to the financial institution that will accept the IRA rollover, he points out. “But there is a Department of Labor [DOL] safe harbor for selection of and monitoring of that rollover party, and, if a fiduciary works under the direction of the safe harbor, it should be able to discharge its fiduciary obligations.”

Once the money is gone, there are some limited monitoring functions with respect to the rollover provider, such as the general obligation to monitor it and be sure it remains appropriate for the plan.

Towarnicky notes there is a range of employer and plan sponsor support methods for maintaining contact with former participants and the methods vary, plan sponsor to plan sponsor. He says, “Just because you ended your employment, whether that was voluntary or involuntary or perhaps part of a corporate transaction, that didn’t mean you ended your relationship with the employee benefit plan.”

Asked, for example, how United Technologies Corp. (UTC) does so, Kenneth Levine, the company’s director global retirement strategy, says, “We do communicate with our terminated participants in the Savings Plan, and we’re happy for former employees to leave their balance in the plan. By doing so, they continue to partake in our great features, such as the Lifetime Income Strategy, low fees and the Income Fund.

“We allow former employees to continue to pay off loans after job termination, to initiate new loans and roll over into the plan. Our plan allows partial withdrawals, which gives flexibility to the former employees. And participants with a balance in the Lifetime Income Strategy benefit have their income benefit—the guaranteed minimum withdrawal benefit—to consider.”

According to Levine, UTC’s communication with former employees starts with a mailer titled “You’re Leaving United Technologies. But your money in the UTC Savings Plan doesn’t have to.” He adds, “Former employees continue to have full access to Your Gateway, our employee benefits portal—and the financial planning tools and features that go along with that—which we hope helps our former employees on their journey toward financial independence.”

Employers, of course, may communicate about other extended benefits besides the retirement plan, Towarnicky says, pointing to COBRA or, less likely, retiree health coverage. Additionally, a participant may want to convert a group term life insurance policy, should he have one. There are also claiming decisions in terms of money he may have deferred to his health care or day care spending account, and maybe a health savings account (HSA), which, based on regulations, is always 100% vested and will go with the individual.

Beyond Administration

But there are other reasons to continue a relationship beyond those to do with plan administration. Some plans have an administrative and a social connection with their retirees.

Towarnicky says, “A former employer of mine has a website for retirees that has no confidential information on it but includes mandated disclosures such as summary plan descriptions [SPDs] for the 401(k) and for the DB [defined benefit] plan. A subset of retired employees has retiree health care; there is a wellness program for retirees; retiree life insurance; and, for the Medicaid-eligible, a credit to a health reimbursement account, and alternative benefits for those not Medicaid-eligible.”

The employer sponsors an HSA-qualified health plan. “With some of these situations, you have an annual enrollment process” Towarnicky observes, adding that the employer offers Voluntary benefits such as dental and vision plans, legal assistance and more.

“This is an active employer who has been around for 100 years,” he notes. “It has made a significant investment and still maintains a DB plan, using a cash management plan, for new hires.

From a social media perspective, the company also posts notices of deaths and retirements, retiree events for gathering socially, and a Facebook page to post memories. There are annual reunions and holiday concerts and, for those who wish to go, retirees are always invited to the annual corporate meeting.