Is there regulatory guidance that would indicate whether forcing out terminated participants is favorable to keeping them in? What fiduciary liabilities are absolved by forcing them out (assuming this is consistent with the plan document)?

Q & A from a former practicing ERISA attorney

Welcome to our new question and answer feature. Periodically we will be posting a Q&A segment that will feature plan sponsor questions by former practicing ERISA attorney Joel Shapiro.

Q: Is there regulatory guidance that would indicate whether forcing out terminated participants is favorable to keeping them in? What fiduciary liabilities are absolved by forcing them out (assuming this is consistent with the plan document)?

A: Great question! Assuming consistency with the plan document, there is no expanded fiduciary liability in forcing them out of the plan, as this is an allowable plan provision. As to whether cashing participants out is favorable to keeping them in, that depends on benefit to the plan or benefit to the participants.

An example would be if the plan is of significant size to have competitive expenses and access to sufficiently diverse investments including appropriately selected TDFs, it should typically benefit most participants to remain in the plan from an investment perspective.

From the viewpoint of the plan, if participants leaving the plan leave it in a less competitive pricing structure, it would benefit the plan to keep them in. Since these are low account balances, this is unlikely to be the case.

There are potential positives and negatives for both plan and participant interests, therefore it is best determined on a case-specific basis, but most typically it benefits the plan to cash out low account balances as if assets remain in the plan, the plan fiduciaries remain responsible for all prudence requirements including distributions to terminated participants. So, small account balances can be an inconvenience to the plan and fiduciaries.

About Joel Shiparo, JD. LLM

As a former practicing ERISA attorney Joel works to ensure that plan sponsors stay fully informed on all legislative and regulatory matters. Joel earned his Bachelor of Arts from Tufts University and his Juris Doctor from Washington College of Law at the American University.

Founded in the 1950s, Carroll Consultants, Ltd. provides investment advisory, retirement plan consulting and administration services to clients throughout the country. For further information about this article, please contact Marcie Carroll at mcarroll@cclbenefits.com or (610) 225-1210.