Labor Department Issues Final Regulations on Orphaned Retirement Plans

Washington, DC, May 4, 2006 - The Department of Labor has published final regulations regarding the termination of “abandoned” or “orphan” retirement plans. The guidance provides a process by which service providers can voluntarily take over and terminate plans believed to be abandoned by the plan sponsor, an initiative the Institute has strongly supported.

Background
When businesses go bankrupt, merge, or are acquired by another business their retirement plans, such as 401(k) plans, may be abandoned or “orphaned”. Under these circumstances, custodians such as banks, insurers, and mutual fund companies would continue to hold the assets of the abandoned plans but did not have the authority to terminate the plans and make benefit distributions. In addition, participants and beneficiaries were unable to access the benefits they had earned.

In March 2005, and at the Institute’s urging, the Labor Department’s Employee Benefits Security Administration (EBSA) proposed rules setting up a process for terminating abandoned retirement plans, so that benefit distributions could be made to participants and beneficiaries. In a May 2005 comment letter, the Institute expressed strong support for the Labor Department’s initiative and made a number of recommendations to further enhance the program and benefit a greater number of participants and beneficiaries in orphan plans. 

The final regulations reflect several of the Institute’s suggestions. Specifically, the final regulations outline:

• a procedure for financial institutions holding the assets of an abandoned plan to terminate the plan and distribute benefits to the plan’s participants and beneficiaries, with limited liability;
• a fiduciary safe harbor for making distributions from the terminated plan with respect to participants and beneficiaries who fail to make an election regarding a form of benefit distribution; and
• a method for filing a terminal report for abandoned individual account plans.

The final regulations and class exemption are effective May 22, 2006.